10% Rule

[AminMurji]

I have read Don Campbell's book and he talks about the 10% rule for positive cash flow. i.e Annual rents must be at least 10% of the purchase price of the property. Can anyone tell how that can be achieved with the current price of real estate? I live in Edmonton.

 

[Mike Milovick]

My understanding is that the rule has been revised to 8% based on lowering of interest rates since the initial book came out...



Having said that, the 10% rule is a "quick and fast" ratio. The bigger, underlying concept is ensuring the property has positive cash flow and is located in a fundamentally, economically strong area.



Basically, you want to look for positive cash flow in areas that should provide future upswing...



Mike

 

[bizaro86]

I'd like to start my post by saying I don't have any knowledge or interest in the property I'm posting as an example, and am not recommending you or anyone else buy it. There is more than one factor that goes into determining whether a property is a good buy, and I don't know anything about this one but the price and size.



All that being said, the following 2 bed apartment style condo is listed for $65,900.



http://www.realtor.ca/propertyDetails.aspx?propertyId=10180182&PidKey=-1100923264



65,900 x 0.10 / 12 months is $541 per month. I'm not familiar with the neighbourhood, but I suspect you could get more than $550 for anything in Edmonton.



Just because this property would meet the 10% rule doesn't mean its a good buy though. Expenses would eat up most of a hypothetical $550 rent (condo fees and taxes alone would get you to around $400/month, I would imagine).



Similarily, a property that doesn't quite meet the 10% rule (ie 8% as above) might be a great buy if its in an area where rents are high relative to expenses.



Regards,



Michael

 

[wgraham]

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Hi there,





funny enough I have just gathered data for Calgary that is based on the 10% rule and will be presenting it in the next couple of months to the REIN members.





I have found a couple sources for real time average rents and property values by neighbourhood and have put them together to see which areas pass the 10% rule! This is the sort of thing that I searched for hours and hours as a new member and guess what....it didn't exist! This one single report will save new REIN members countless hours. I hope that those already buying property have this one figured out but this may open your eyes to new opportunities! I remember, as a new investor, analysing about 50 properties before I found one that made sense! I started with condos in the SW, then houses in the NE, then up-downs in the NW.....the list goes on and on. This report will eliminate that for you!





I remember just how frusterated I was and I thought that the 10% rule was garbage! Little did I know I just had to get resourceful and creative and yes it works!


Oh and I also have data for the most searched on nieghbourhoods! So if you have a neighbourhood that passes the 10% rule AND is being actively searched for by your prospective clients`..GOLDMINE!





I am excited to get this out to you guys! As soon as I have the report completed I will be sharing it at REIN and making it available on my website....stay tuned!





Don't worry Edmonton I have data for you too but you are going to have to wait a little while longer

 

[emilyzuck]

HI, Everyone


!0% cashflow sounds good. However, do you thinks rental properties can generate 10% cashflow in B.C unless you put lots of your own cash into it?


especially in Metro-Vancouver area?


In my opinion, I don't think it is possible.


If anyone can find any area or any property in Metro-Vancouver which can create 10% net cashflow, please let me know.


I would be very much surprised to see that.



thanks

emily

 

[2ndstory]

[quote user=emilyzuck]

HI, Everyone


!0% cashflow sounds good. However, do you thinks rental properties can generate 10% cashflow in B.C unless you put lots of your own cash into it?


especially in Metro-Vancouver area?


In my opinion, I don't think it is possible.


If anyone can find any area or any property in Metro-Vancouver which can create 10% net cashflow, please let me know.


I would be very much surprised to see that.



thanks

emily





I think a 10% net cashflow is impossible anywhere, unless you have little to no mortgage or own the building outright. Gross is doable in some markets, like Winnipeg, but pretty unlikely in Vancouver.



Nik

 

[bizaro86]

[quote user=emilyzuck]

!0% cashflow sounds good. However, do you thinks rental properties can generate 10% cashflow in B.C unless you put lots of your own cash into it?


especially in Metro-Vancouver area?


The 10% rule doesn't describe your rate of return, it says you should try for GROSS rents to equal 10% of the building purchase price, and it's just a rule of thumb. For example, a property purchased for 200,000 would required 20,000 per year of rent to meet this rule, or $1,666 per month.



I looked very briefly, and found property in metro Van that probably meets this requirement. Example: MLS # V868825 is a 2 bed 1 bath apartment style condo in Richmond listed for $129,900. CMHC's most recent rental market report indicated an average rent for Richmond 2 bedroom apartments of $1096 per month.



1096*12/129900 = 10.1%.



Source for CMHC data: https://www03.cmhc-schl.gc.ca/catalog/productDetail.cfm?lang=en&cat=79&itm=53&fr=1298664513102



**I don't know anything about this property, and I don't recommend you purchase it. I'm simply using it to illustrate that 10% properties can be found just about anywhere, it just takes a bit of work. The other point is that 10% gross isn't the end-all be-all of real estate investing. It's just a tool to hone your thinking.

 

[bizaro86]

[quote user=ThomasBeyer]That is a bold statement that is probably wrong.



Yes, in some locations 10% properties can be found. However they are not usually in great shape, great locations or economically strong regions !



6-8% is more common for properties in decent condition, decent locations or strong regions !


I found an example of one in the lower mainland, and it took me all of 3 minutes. What market in Canada would be harder than that? I was quite clear that there were other factors, and that these properties are probably in bad neighbourhoods and in bad condition.



I didn't say you could find good investments in any region, I said you could find 10% properties in any region. For all I know these properties have super high expenses (condo fees), are in bad areas that would have high vacancy and maintenance and are in very poor condition and would require extensive maintenance. They still meet the 10% rule, but my understanding is that its only a filter, not the end all be all of real estate investment.



Of course, you are probably right, insofar as absolutes are very likely to be wrong.



I'll amend my statement: "10% properties can be found in the majority of markets" and add the caveat (again) that they aren't necessarily good investments.



Regards,



Michael



**I'm not sure why this post is above the post by Thomas which it replies to, but they are out of order

 

[Thomas Beyer]

[quote user=bizaro86]"10% properties can be found in the majority of markets" and add the caveat (again) that they aren't necessarily good investments.


indeed !



Therefore, use it as a broad filter only and use expenses, upside, vacancies too in your analysis !

 

[emilyzuck]

Hi, Bizaro86



Thank you for your response.

First of all, I should apologise for my post saying 10% net cashflow.

You're right.

I should correct GROSS 10% cashflow.



Thank you for the link as well.



Thanks



emily

 

[Thomas Beyer]

[quote user=bizaro86]10% properties can be found just about anywhere, it just takes a bit of work.


That is a bold statement that is probably wrong.



Yes, in some locations 10% properties can be found. However they are not usually in great shape, great locations or economically strong regions !



6-8% is more common for properties in decent condition, decent locations or strong regions !

 

[dplummer]

Can this guideline be applied to smaller commerical properties ?



Doug

 

[Thomas Beyer]

[quote user=dplummer]Can this guideline be applied to smaller commerical properties ?


Complex problems have simple, easy to understand, wrong answers !



"commercial" is a wide field ! Campground ? Industrial ? Marinas ? Pubs ? parking lots ? office towers ? retail centers ?



The NET INCOME is critical in all those areas (as it is in single family) .. not the gross income !

 

[dplummer]

Gotcha!



Doug

 

[2ndstory]

[quote user=ThomasBeyer]

The NET INCOME is critical in all those areas (as it is in single family) .. not the gross income !




Amen to that!



Nik

 

[housingrental]

This cannot be achieved currently in Edmonton

 

[bizaro86]

[quote user=housingrental]This cannot be achieved currently in Edmonton






What can't be achieved in Edmonton? Finding properties that meet the 10% rule? Because I have an example upthread that absolutely would have 10% gross cashflow. Net cashflow is of course a different story, but it's a bit odd to show up here with a one line argument, without saying what "this" you're talking about.



Regards,



Michael

 

[wgraham]

The last house I bought was $275k that brings in rent of $2450.....I would say that is pretty close. So yes 10% is possible in Edm.

 

[bizaro86]

[quote user=wgraham] The last house I bought was $275k that brings in rent of $2450.....I would say that is pretty close. So yes 10% is possible in Edm.





This exceeds the 10% rule. 2450/month *12 months= $29,400 per year x10 = 294,000 > 275000



Of course, it's easier to say something can't be done with a one-liner than to refute specific examples of how it can be done...



Regards,



Michael

 

[johnsu]

My 2 cents is that you be comfortable managing the fluctuations in cashflow. Residentail properties make the money on the appreciation. Cashflow is very minimal money made and typically vacancies, damage ect will eat up your cashflow pretty quick and easy. I'm not saying buy negative cashflow but be aware the real money in residential is made via market appreciation. So my suggstion is be comfortable with the cashflow after you run the numbers but a rough filter like 10% in my opinion is not the best tool to make the most of residential properties. Look at the dollar amounts cause that's what's coming into/out of your pocket!