Can we still do a deal and make money at a 1% rent to purchase price ratio? Is a question I asked Ben Day from Lionshare booking who services Oklahoma City investors investment accounts daily. " No.. no. and i actually really hate the 1% rule" Ben answered passionately.
He went on to explain that its great on the beginner side to understand basic math but does not work at all to predict cashflow numbers because its missing a-lot of variables , the major one being the debt servicing component. When you buy without using all cash (%95 of all home investment purchases) your interest rate plays a huge often overlooked factor in your cash flow. Sure, in the past in Oklahoma City (1990-2013 it was a normal thing to purchase properties at 2-5% of purchase price coming in for rent each month, so precise deal analyses was not near as important because of a large margin for error since cash flow was so high. With the advent of HGTV, podcast books and countless training seminars promising millions in real estate returns when investing, demand for investments have increased and banks have responded by selling loan products geared towards buying rental properties. It is a challenge now to find a bank that wont finance rental properties where in the past it was the opposite. With easier financing comes more buyers to the table ready to purchase their first rental property all with the goal of passive money coming in while they kick back, toes in the sand in the warm tropical sun.
No worries! deals are still out there, they are just harder to find through the maze of sellers looking for the above mentioned 1% (or less!!) rule investors and Day gives us an easy metric thats much more accurate that will help you evaluated a deal fast and help you filter through the many bad deals to find the winner.
Bring in the Debt service coverage ratio
Day began to describe the metric in very simple terms, he said if you have a rental and your rent coming in is $1,000 per month but your Mortgage payment is $1,000 per month your rent to debt ratio would be 1:0 with every dollar coming in then going out to expenses. Now if you have $1000 in rent coming in and your mortgage payment is on $500 than your ratio would be 2.0 with 50cents of every dollar going to expenses. "Bankers would be thrilled to lend at a 2.0 ratio... Most often bankers will lend if it hits a 1.25 or greater" Day says. That looks like this, $1000 in rent coming in and your payment being in at $750 or less. Now we can see why the 1% is not the metric to use when evaluating a deal in Oklahoma City.