Evaluate Rental Property Like a Pro

Note: This is a reworked version of a post previously made at Mr. Money Mustache. If you haven’t been there yet, you owe it to yourself to check it out.  It’s really the Mecca of the lifestyle we aspire to live.

Diamond in the Rough or Money Pit? Evaluate Rental Property

Diamond in the Rough or Money Pit?

Knowing how to evaluate rental property by the numbers is as important as picking good property management and placing good tenants.

I am still learning, just like everyone else.  Relative to many veteran landlords, I am a rank amateur.  However, I’ve done a few deals now, made a few mistakes, and hopefully learned something from them.  I have a few cash flowing properties, and each has been more successful than the last as I raise my standards, learn how to anticipate some of the trouble areas, and most of all, have greater confidence in my ability to oversee all aspects of a deal.
I frequently answer questions about whether or not a given property is a “good rental.”  Though this is a highly subjective question, many rentals people consider are virtually guaranteed losers.  This is usually because people fail to consider all the possible costs of buying and owning a rental, and/or because they are overly optimistic about vacancies, repairs, etc.

My own real estate investment strategy is buy and hold for cash flow.  The goal is to build a steady stream of income that compliments the safe withdrawal rate from my stock and bond portfolio.  Thus, my analysis makes bottom-line cash ROI the most important factor versus appreciation.  That is not to say that quality of neighborhood, tenant, and prospects for the city aren’t just as important– they’re just things that I consider before I ever get to evaluating the raw numbers.  I’m a California resident and have found that the best deals in my price range are out of state, even after accounting for property management.

My analysis spreadsheet is based on the J Scott Single Family Home analysis spreadsheet on biggerpockets.

I’ve uploaded my modified version, which corrects a few Excel issues with the original, and enhances it somewhat to allow for evaluating duplex/triplex/small multifamily units.   The version I put there contains real numbers for a property I recently purchased in a major midwestern market.  This version also has some tweaks that are specific to the area/property management but if you decide to use my copy as a basis for your own, it should be pretty easy to figure out.

A Single Family Home (SFH) Rental in the South - Evaluate Rental Property

A Single Family Home (SFH) Rental in the South

The sale price is $65,000.  It’s a 2/1-per-unit duplex located in a C+ neighborhood with somewhat below standard schools.  The average household income for this part of the ZIP code is approximately $40K.  The unit was priced too low for the market and was pending within 24 hours of being on the market.  That deal fell through and I moved on it quickly.  The duplex is in above-average condition for the neighborhood and will rent for approximately 650 per unit.

Now, let’s start plugging in numbers I feel comfortable with.  Again, these are my actual numbers.  You could do better/worse/differently with more exotic financing, but these are fairly standard, which may help those with no idea what to expect.

Evaluate Rental Property Based on the Numbers

Downpayment %:  Because this will be an investor mortgage on a multifamily, I will need to put down 25%.  Fannie Mae requires that investor loans on multifamily properties be 25% through the first five financed properties (after which it becomes a 30% downpayment).  It’s 20% on single family for investors.  Thus, my downpayment amount is $16,250.

Interest Rate: Also because it is a investor mortgage, the interest rates are slightly higher than consumer.  The rate I got on this property with a 750 credit score was 4.625%.  Roughly in the same ballpark I’ve gotten on my last few properties.  My mortgage rate for new properties will rise as the Fed raises interest rates, but should be affordable for some time.

Improvements: Any improvement needed to get the property ready for rental.  Remember, the goal is to be in good, safe, and clean condition, with amenities appropriate for the neighborhood, not amenities which you would demand for your own home.  Initial forecasts for improvements were conservatively $1000.  After the inspection, I learned that there are some electrical issues needing repair (missing grounds and a few knob-and-tube issues) so that was revised to $2500.  In the end, my repair costs ended up being $2,140.

Closing Costs: The total costs to close, including inspection, were $3,251. Due to the issues found during inspection, I was able to negotiate a $500 seller credit at closing, and $187 towards the seller’s portion of the title insurance.

Per-unit market rent:  The desired rents for this property were $650 per unit.  This is on the medium-high end of average for the neighborhood, which is justified by the extremely good condition of the property.  Median rent in the area is about $612.  Don’t delude yourself about rents if you don’t know the area!  At least use rentometer, check Zillow and Craigslist for rentals, and get somewhere in the ballpark.  Ultimately, I ended up accepting $625 from the existing tenant (up from $550) in order to get them onto a new lease and avoid paying a tenant placement fee. I placed a second, new, tenant for $650.

Vacancy/Loss Rate: Set at 10%.  Average vacancy for the area is 4-5%, but I prefer to estimate high and use any extra income from low vacancy to fill reserves quicker.  This is one of the areas that I consistently see people underestimate.  There are always hand-wavy arguments about how “the market is really tight in the area” or “it seems like everything fills up quick around here.”  It costs you nothing to estimate conservatively.  At worst, you might pass on a deal that could be good but falls on the wrong side of the bubble because of being too conservative.  At best, you only pick the cream of the crop because of high (but not unrealistically high) standards.

Property Taxes: $1551 per year currently for this unit.  City taxes are normally very high, but this area has ~25% lower taxes than some of the others I have considered.

Insurance: $904/year.  This is 1 million in liability coverage, full replacement value, DF1 insurance.  The deductibles on repair/replace are $2500.  I knew about what I wanted to spend on insurance, so went back to the insurance broker 4 times to get adequate liability (first quote was 300K), adequate property value (first was 53K) and a higher deductible (first was the lowest/most profitable for the company).  The DF1 policy covers fire/wind/smoke, but excludes things like flood, war, etc.

Maintenance and Repairs: 5% of rents per year is my estimate, so $689.  This is one area where I may not be conservative enough, but I hope for my conservative estimates elsewhere to help provide some margin for error.  I also have income from other properties that can help compensate for unexpected high expenses.

Property Management: The property management is 10%.  You may want to manage your own property, but for a variety of reasons I believe it’s best to build it into the budget anyway.  You may want/need to move.  You may want to travel long term in retirement.  You may become disabled.  Again, the only risk in being too conservative is that you pass on a deal that might otherwise have been profitable.  Don’t be a motivated buyer.

Annual re-leasing fee/tenant placement:  This is another critical element to consider if you will be using property management.  Many/most property managers charge you something, often half or all of the first month’s rent, to place a tenant.  This is a large percentage of your cash flow if you turn over tenants too frequently.  The most important thing you can do (aside from picking decent property in the first place) is place quality tenants.  If you’re turning over tenants every year, or more often, something is wrong and it’s going to eat even the best profitable-on-paper deal alive.  This property manager charges the full first month’s rent to place a tenant, and $195 to sign a new one year lease.  I am wary of this as I pay half a month elsewhere, but I have been frank about my expectations and made it clear that if I see a pattern of poor tenants, they will lose my business quickly. I anticipate that I will re-sign one lease a year, and replace one tenant a year.  This should be an overly conservative estimate with good tenants (and being a good landlord).

Annual Inspection: Read your property management agreement!  You need to account for every cost.  The PM offers an optional annual service to change air filters, inspect appliances, smoke detectors, radon detectors, change batteries, and do some light maintenance.  I’ll probably use it, so it’s on the budget at $130.

Sewer Service: What utilities is the landlord obliged to pay?  How much do they cost on average?  Landlords in this city must pay water and sewer, though there is some gray area about whether they can charge them if the amount is “excessive.”  $800 per year per unit for water and sewer is average.

Water Service: See above, same deal.

Lawn Care: Code enforcement requires trimmed lawns and at a duplex, the landlord is responsible.  Lawn service twice a month for seven months out of the year will run $66.

Putting It All Together

Let’s see how it stacks up against the 1%/2% rule:

65000 (purchase price) + 2140 (improvements) + 2564 (financing/inspection costs) = $69,704 Total Cost

(1275 rent * 12) * .9 (estimated vacancy) = 13770

(($13770/12) / 69704) * 100 = 1.646%

The 1.646% number is the amount of our purchase price we collect in rents each month.  Some people aim for 1%, I aim to be as close to 2% as possible.  So, 1.646% is pretty nice!  Now let’s do a more detailed analysis.

Accounting for all these costs, which are quite a bit higher than some areas, the total annual expenses in year 1 are $7,557 even.  Accounting for vacancy, the rents are $13,770.  Thus, the Net Operating Income (NOI) is $6,213.  After mortgage ($3008), the cash flow is $3,205, for a cash ROI of 15.30% with a fairly conservative analysis.  Throw in the equity gained and the total ROI is 18.97%.

The Cash Flow

The monthly cash flow with all of these assumptions is $267, but I’ll be pulling out $270 per month knowing that I have estimated most numbers here pretty stingily.  I’m personally looking for about $100 per month in cashflow per $10,000 of my own money invested, which this meets handily.  I’m very happy with this deal.  If any one of the very conservative variables tips in my favor, I’ll fill my reserves that much faster.

What if it all goes right?

The temptation would be high to see greater than the $267 “safe” cash flow coming in and to use it for something.  Resist!  Vacancy will come.  A roof replacement will come.  There will come a day when I have filled my reserves so much that I can start to skim off a little more cash flow, but that day is still far off.

My current plan reinvests all the cash flow in future properties.  I’m buying 2-3 a year for the next 5 years.  This will be a serious challenge for the first two years, after which the cash flow starts buying properties for me almost as fast as I can on my own.

What if it all goes wrong?

Hopefully my conservative estimates give me breathing room if it does, but if not, I have 6 months of PITI for each property just in case right from closing.

I hope that his article will help you in more fully understanding some of the pitfalls and hidden costs when getting into Rental Real Estate, and how to evaluate rental property more confidently on your own.  Nobody knows what the future will bring, but by doing the correct due diligence, it’s possible to make real estate a reliable and profitable investment.

Here again is the link to the property evaluation spreadsheet on Google Sheets.

A Useful Saving Tool

I track my net worth, investments, and savings progress towards down payments on my rental properties, using Personal Capital. It’s net worth and investment monitoring and savings planning tools are second to none. The best news of all is that it’s 100% free. I recommend it as a tool to all readers, and even though it comes at no cost to you, signing up through a link here and completing your profile to track your online accounts may help to support this site, too. I’d appreciate the support if you have a chance to check it out.

What do you think?  What are critical considerations when beginning to evaluate rental property?

If you’re getting started with Rental Property, consider supporting this blog by setting up a free Personal Capital Account.  It’s a great way to track savings for a downpayment, or the fluctuating value of your investment with Zillow Estimate integration.

44 thoughts on “Evaluate Rental Property Like a Pro

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  3. Faye

    Thank you for this clear and detailed article! I’ve been thinking about getting more involved in this for some time, and appreciate the information and helpful tips you’ve laid out. An easy general formula to follow to make value decisions.

    1. The Vagabond Post author

      Faye, you are very welcome! Let me know if anything is unclear as you investigate more- I am happy to update the article to clarify anything that could use a little further explanation.

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  6. Tania

    We’ve considered getting into rental properties for a while but have found it intimidating. This article lays out analyzing the profitability in a very straightforward way. Thanks for sharing!

    1. The Vagabond Post author

      Thanks, Tania! Truthfully, I got caught in a bit of analysis paralysis myself before I jumped in on my first property. It’s so daunting to think that you could potentially be making a mistake. The good news is that if you’re rigorous (Which I believe I am/hope that I show how to be in this post) it’s fairly straightforward to make a good investment. Please feel free to let me know if I can help if you decide to look into rentals again in the future.

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  8. Scott

    Thanks for your excellent information. I’ve flipped one house and looked into getting a long-term rental, but I have a hard time finding a PM to trust. Seems that many PMs are real estate sales agents that only do PM in hopes of getting your business when you sell. They aren’t very good at it and could care even less about your property. The fact that you are able to find good PMs from afar is encouraging…perhaps I will investigate rentals again.

    1. The Vagabond Post author

      Thanks, Scott, and thanks for the comment! I am glad that it was interesting and hope the method will help you with your analysis if you decide to get back into it. I have had good luck with my PMs so far, but I think there’s a certain amount of expectation-setting at the beginning. You have to watch things like a hawk as you get first tenants in, keep an eye on repairs, etc. My experience has been that if you set a high standard (with the occasional spot-check) right off the bat, you tend to get consistently good service. Of course, it also helps if you’re buying in a market with a lot of competition.

      1. Scott

        Do you have a maximum set cost or percentage of value that you are willing to spend to fix/rehab a home, or do you look for mostly turn-key properties that are good value?

        1. The Vagabond Post author

          In a perfect world you’d find the ideal mix of value and condition, but it seldom ends up working out that way! There’s a certain amount of cash I can spend up front when I’m searching for a property, so obviously down payment, closing costs, and initial improvements have to fit within those parameters. I saw a deal this week that had great numbers, but was going to require almost $100K up front because it was an 8 unit needing a fair amount of work. For someone with that kind of cash, it probably would have been ideal.

          For me, I’m looking at putting in no more than $25K up front per property, which in my markets tends to be around $20K in down payment and closing costs, and $5K in improvements. It could just as easily tilt more towards improvements over down payment, it just doesn’t tend to in the cities I’ve bought in so far.

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  11. Aperture

    Thanks so much for the overview of your analysis process. It never really occurred to me that real estate could be a viable investment opportunity. Your detailed how to helps me better understand how I might take the plunge. I really appreciate it. I plan to search more including deeper pockets as you have suggested elsewhere.

    If you want an idea for a future article, I would love to learn how you zero’d in on the locales where you decided to purchase property. How would you choose Smithville, NC vs. Jonestown, PA vs. Tomdickandharry, NY as a place to purchase rentals? If you are aware of such an article already, I would appreciate a link. Best wishes and congrats on the duplex, Ap.

  12. Mr. FI

    Hi Vagabond,

    I have been absorbing a lot of your articles on property investment–really good stuff. A situation I wanted to float to you is this: my in-laws own a rental property in San Antonio, TX. It was their primary residence until they moved up here to Montana about 15 years ago.

    Anyway, their cash flow is currently negative. They never bothered to refinance to a lower interest rate and so they have a 6.25% int rate on their mortgage. However, they only have about $40,000 left. Their monthly mortgage escrow is $1042, while their rent income is $950.

    On top of that, they have had to make several major repairs due to some fringe hurricane storms that hit last year. It’s kind of a money suck and we have recommended that they sell in the past. But they are concerned about capital gains/depreciation tax upon sale.

    So I thought of maybe something sort of brilliant. We would pay off their remaining mortgage and then have them gift us the property. While technically the incur the gift tax, the could simply use their unified tax credit because they won’t possibly leave an estate worth over $5 mil.

    This gets them immediately out of a current money suck for them, and gives us our first rental property. It would be a positive cash flow for us because we’d own the property free and clear. We know the property has had repairs/upgrades because they just did them, they have tenants, and a property manager already. We would look to up the rent a bit to maybe $1000/mo.

    Based on your calculations, we’d hit the 2% guideline. I think it’s a win/win. Do you see any problems here?

    1. The Vagabond Post author

      Hey there Mr. FI!

      Really interesting question. You’re right that you propose a solution that may work for everyone. To be completely honest, I haven’t dealt with this specific situation before, but I do know you have to be careful with the way your pay off their mortgage, as well. Forgive me if you’ve already considered this. Just wanted to highlight the fact that when you pay off their mortgage directly, that you would probably be on the hook for gift taxes too. There are a couple of ways around this that I know about– you could pay off the mortgage anonymously, or you and your wife could each gift $10,000 to each of your parents, keeping each of you below the annual gift tax exemption, and achieving the same end. Anyway, just something to think about.

      Normally, when people talk about inherited or gifted properties, the advice is to look at the property’s *market* value, and decide whether you would pay that amount to purchase the rental income… at which point I’m guessing this property wouldn’t be quite 2%. That said, I think there is more at stake here than whether you are getting maximum return. Obviously, if you wanted maximum cash flow, you would just take your $40,000 and finance a couple of great rental properties with it. In light of the fact that the primary goal is to solve your in-law’s problem, I think this is a pretty great solution for everyone.

      One other thing to consider, once all is said and done and the title is in your name, and you’re feeling comfortable as the landlords of a single property: You could also take out a mortgage on the property, get your own cash back out at a much more favorable interest rate, and even pick up a few more leveraged rental properties. Not something you have to do, but it’s an option you’d have. I hope this helps! You guys are awesome for looking for a way to help your in-laws out!

      1. Mr. FI

        I see what you’re saying–yes, based off market value it wouldn’t hit the 2% mark. I have been reading that finding even 1% is difficult in many markets. I do see the appeal of spreading that 40k out, but have you consistently found properties like this Cleveland one? That’s a crazy low cost for a single family, let alone a duplex.

        Good point on us gift taxing towards them. The anonymous payment is interesting. I believe the individual tax exemption is $14,000 per individual now, but that leaves us $12,000 short…but that wouldn’t be a big deal if we also used our unified tax credit.

        Thanks for the detailed response!

        1. The Vagabond Post author

          Yeah, I actually just bought another property that’s a little bit better than this one. In the right markets, they’re not too tough to find.

          What I was suggesting was:

          1) “You” gift $10,000 to your wife’s mother.
          2) “You” gift $10,000 to your wife’s father.
          3) “Wife” gifts $10,000 to her mother.
          4) “Wife” gifts $10,000 to her father.

          (quotes present because I’m trying to emphasize that you are acting as a logistical unit, but for tax purposes, you are giving as individuals)

          In this way, you each stay below the $14,000 per gift exemption, but you spread it out amongst all the recipients and givers to accomplish the entire amount tax-free (because the $14K limit isn’t total of all gifts, but total per giver-recipient pair)

          This article may explain it better:

          http://www.forbes.com/sites/ashleaebeling/2014/10/30/irs-announces-2015-estate-and-gift-tax-limits/#5056b70738f4

        2. The Vagabond Post author

          Here’s another one that addresses this specifically:

          http://blogs.marketwatch.com/taxarchive/2011/03/17/helping-parents-while-avoiding-taxes/

          A couple can give up to $52,000 to a set of parents free of gift tax every year. The law allows a taxpayer to give up to $13,000 a year to as many individuals as he wants, so the child and spouse can each give $13,000 to each of the parents.

          I think this means that what I suggested a bit ago is ok… but probably best to bounce it off a CPA just to be sure.

    1. The Vagabond Post author

      Hi Mike, the easiest way to do this is to set the down payment to 99.9999%. Of course, the usual cautions about understanding the power of leverage and how your cash ROI will be much lower apply.

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  15. Andra

    This was extremely helpful… for someone like me who is thinking about investing this was a home run……

    thank you thank you..

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  17. Mike

    Great stuff, thanks! Just curious if you have tips on lending on multi-plexes. Seems like some lenders refuse to do investment mortgages outside of SFHs, and sometimes duplexes, and most seem to refuse to count future income, so even if I could find a product, my DTI really limits my max loan size

    One option I have would be to take a HELOC on my main house, buy something in “all cash” for competitive advantage, then turn around and mortgage it later with it already being tenant occupied (thus helping my DTI). Thoughts on the first or second dilemma?

  18. Jordan

    Hi! A couple of questions about long-distance investing based on your book on that subject. You say toward the end of the book to itemize what you want done before calling the contractor, but especially if you’re long-distance, isn’t it the contractor who tells you what needs to be done, and therefore who provides such an itemized list in the first place?

    Also on a similar subject, I know it’s customary to get multiple bids for the work. One issue I don’t think you don’t really address in the book (though I could have overlooked it) is whether or not you need to pay contractors to give you an estimate. People often say that contractors will give estimates for free because they’re hoping to get the work, but, mathematically speaking, if I get bids from, let’s say, five contractors, I won’t be using four of them. Even if contractors are willing to give people a free estimate once, don’t they catch on soon and start charging for it, and, if so, doesn’t this process get to be an expensive proposition?

    Thank you!

    1. The Vagabond Post author

      Regarding your first question, when you purchase property you should always have an inspection contingency. A good inspector will provide you with a detailed report of all mechanical and structural defects on the property, which will allow you to negotiate reductions in price before releasing the contingency. It will also give you the basis to create a scope of work to get the property “rent ready.” You can share the inspection report with trusted members of your team, but particularly with your realtor and property manager. They can help you figure out what issues can be ignored, which need addressing immediately, and which can be addressed in the medium-to-long-term.

      Regarding paying contractors for estimates, you should run fast and far from anyone who wants to charge you to quote rehab work! All contractors are well accustomed to the bid process, and are aware that a savvy property owner will be getting at least one other bid. You *should* make an effort to give work to contractors who take care of you (all other things being equal), but you should always get multiple bids on a large scope of work, and trustworthy contractors will never attempt to charge you for doing so. There’s nothing for them to catch on to, this is simply the nature of the business.

  19. Jordan

    Thanks for the response! Think I’m clear on the second question — sounds like providing bids for projects that they don’t end up getting hired for is just part of the business for them. Again, of course, I would love to reward them for their effort in giving me the quote, but I can only choose one, which means that at least one contractor that gave me a bid just won’t end up getting the job. Got it.

    To clarify your answer to the first question, though, the exact text I’m referring to is on pp. 132 and 133 in which you state “before you start calling contractors, there’s one important task you should complete. To the best of your ability, itemize exactly what you want done to the property.”

    First of all, my own ability in this regard is very limited, especially from long distance! So now what you seem to be saying here is that first I get an inspector to advise me on what I should want done to the property, and THEN, from that report, tell the contractor what I want done to the property. Is that correct? Thanks again.

    1. The Vagabond Post author

      You engage an inspector as a part of the purchase process. This is very common in all real estate transactions, investment or not. The purchase agreement has what is called an “inspection contingency,” meaning if anything in the inspection report reveals something you don’t like, you get your earnest money back and can walk away with no consequences. This inspection report should reveal all obvious issues with the property, which may be very small or very major.

      With the help of that report, you can formulate a list of “must fix” items. If you are not experienced enough to know what needs fixing, ask for help from your realtor, your property manager, or both. That’ll get you a rough scope of work that all of your contractors can bid off of.

  20. William Wagner

    I remembered to download the Personal Capital app, but I was on my phone and not the website. Fortunately, I hadn’t created a login, so I came back here and used the link to set up my account. Glad to do so, for whatever trickles your way, because I really appreciate the advice, feedback and the spectator seat on your efforts. Being able to learn from your experiences is very valuable.

    1. The Vagabond Post author

      William, thanks so much. I sincerely appreciate it and while the blog isn’t big business, it’s nice when it at least pays for itself, and helps to keep the fire for blogging burning :). The good news is I have a bunch of articles lined up for next month about where our quest for financial independence has taken us in the past few months that I hope you will find interesting. Thanks so much again.

  21. Jordan

    Okay, one more question for you about the book and long-distance real estate investing in general. I could be opening up a whole can of worms here, as a separate book could probably be written about this subject, but do you think long-distance investing could also be applied to wholesaling? If so, how would one deal with the fact that wholesaling, I’m pretty sure, mostly pertains to off-market deals and that you therefore can’t use real estate agents in the process? Obviously no agent is going to help you with an unlisted property. Once that obstacle is cleared, do you think the rest of the process is pretty much the same, or are there more challenges?

    Would be interesting in hearing your thoughts on this subject. Thank you!

    1. The Vagabond Post author

      Hi Jordan,

      Bearing in mind that I don’t have any wholesaling experience, it definitely *happens* at a distance all the time. That said, I don’t think it’s the best model for making money in real estate, as so much of wholesaling involves building up relationships with people (to get them to sign a contract with you) and a massive amount of playing the numbers. Wholesaling also tends to be very low return on investment, too. A few hundred or a few thousand here or there– good for someone without capital to get started, but bad return on time invested. I don’t really have a ton of guidance on how to wholesale effectively from out of state… but you’re right, there’s almost certainly a book opportunity there for someone!

      1. Jordan

        Yes, I just need someone out there to write it!

        I don’t know. It seems to be a kind of controversial subject in the real estate investment world. Some people seem to feel as you do — others absolutely swear by it. So, I don’t know. It’s something I would really like to give a try, but I live in the NYC area, which is just not ideal for this business. Thus, my interest in long-distance investing in general!

        Thanks for the response.

  22. MG

    Hello! How did you go about selecting your first (and second, etc.) market to invest in? Going through that process now…any advice would be awesome!

  23. Chill Kann

    Awesome! Just the kind of information I was looking for. You have answered many questions that I had. However, there’s one question lingering in my mind, if for some markets getting even 1% is not a viable option then is it worth investing in rental properties? I’m working out my numbers and it seems like the best case scenario is going to be 0.75 % and worst case is 0.5%.

    1. The Vagabond Post author

      Hey Chill,

      It’s possible to make money in lots of markets where the 1%/2% rules aren’t achievable, but in my experience it’s more speculative and requires either very good tenants or making your money through increases in equity. I personally prefer to invest in markets out of my area before taking a risk on a nearby property that won’t cash flow.

    1. The Vagabond Post author

      While some people like to break these out separately, I don’t. If the maintenance/repairs budget doesn’t get used in a given month, it remains in the operating account for eventual capital expenditures.

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