Understanding the 10% rule

[James43]

I have joined the forum and I`m very excited to see all the information that we can share together. I just read Don`s book called, "Real Estate Investing in Canada", where I was introduced to the 10% rule (whereby I should consider property that I can expect to earn 10% in rent for the purchase price of a property (ie: $1000/month in rent for a property valued at $120,000). I read that REIN places Surrey and Maple Ridge the #1 and #2 respectively for real estate investment markets in th Lower Mainland of BC. I`m confused about the 10% rule as it applies to Surrey and Maple Ridge. I`ve been looking into the markets and using the $120,000 property valuation as an example, in both Surrey and Maple Ridge ( according to the MLS.ca website), properties at this level in these areas are unlikely to meet the 10% rule. I say this because when I refer to other sources (ie: craigslist) rents are much lower and the Maple Ridge city website stats average rental rates are also below this 10% rule. So, am I being negative or limited in my thinking assuming the 10% rule doesn`t apply? I want to understand how this does apply....I have a positive approach overall but the facts I`m coming across challenge my thinking. On the other hand, I can see getting 10% on the mortgaged amount of a property but that isn`t the rule, is it?

I do look forward to gaining some insight from people who respond to this post.

 

[Rickson9]

Good investments are difficult to find. If they were easy to find, everybody would be successful.

 

[Thomas Beyer]

QUOTE (James43 @ Sep 19 2010, 11:41 AM) .. are unlikely to meet the 10% rule. ..
It is a rule of thumb.
This is VERY hard to find in vibrant Top 10 towns in BC, AB or SK ..

I the US often 20% is not unheard of or in very small ON, PQ or BC communities that are economically weak.

In multi-family, on a 6% CAP rate the gross rent would yield around 10%.

So an apartment building that rents for $800/month per suite would be around $80,000 per unit .. more or less.

Again, this is VERY hard to find in vibrant Top 10 towns in BC, AB or SK .. not impossibly but hard. If it were that easy, REIN wouldn`t exist and everyone and his dog would do it all the time themselves without any education by clicking in MLS and one or 2 phone calls ! It takes skills, it takes money and it takes TIME .. a lot of skill, money and time actually !

Aim for 7-8% though !

 

[invst4profit]

Aim for 10% and if you make 20 - 50 low offers on properties that would give you that return without successfuly closing a deal maybe consider 7%-8%. However my advise is go to where those deals do exist when starting out in the business if you believe negative cash flow will keep you up at night.

As Thomas states it is hard work, very hard work, to find and close on these types of deals but that is what seperates successful investors apart from the rest.

 

[JimWhitelaw]

1) The original 10% rule has been amended by REIN to be an 8% - 10% "cash flow zone" as a first filter or rule of thumb.

2) As the others have stated, finding such properties is extremely difficult - condos and single family homes almost never meet this criteria now - condos usually because of monthly condo fees and SFH because the relatively high land value vs. the rentable space.

3) Exception to the above is generally SFH with secondary suites and/or rentable outbuildings like garages or workshops. Much better cash flow from those, but they take more work and careful tenant selection and management. Another option for some investors is to look for run-down properties that have deferred maintenance and use your own labour to add value (sweat equity).

4) You`ll probably never find suitable properties just browsing the MLS and looking at houses. Too much competition and the information is too open. You`ll have better luck if you have a smart investor-savvy realtor working to find deals for you, or even better, conduct your own marketing looking for sellers and properties to buy.

5) Personally, I`m not a big fan of the shotgun w/ many lowball offers strategy. I prefer to focus my time on deals that I know I can purchase at reasonable prices.

 

[James43]

QUOTE (JimWhitelaw @ Sep 19 2010, 05:14 PM) 1) The original 10% rule has been amended by REIN to be an 8% - 10% "cash flow zone" as a first filter or rule of thumb.

2) As the others have stated, finding such properties is extremely difficult - condos and single family homes almost never meet this criteria now - condos usually because of monthly condo fees and SFH because the relatively high land value vs. the rentable space.

3) Exception to the above is generally SFH with secondary suites and/or rentable outbuildings like garages or workshops. Much better cash flow from those, but they take more work and careful tenant selection and management. Another option for some investors is to look for run-down properties that have deferred maintenance and use your own labour to add value (sweat equity).

4) You`ll probably never find suitable properties just browsing the MLS and looking at houses. Too much competition and the information is too open. You`ll have better luck if you have a smart investor-savvy realtor working to find deals for you, or even better, conduct your own marketing looking for sellers and properties to buy.

5) Personally, I`m not a big fan of the shotgun w/ many lowball offers strategy. I prefer to focus my time on deals that I know I can purchase at reasonable prices.



Thank you all for your comments as it has confirmed what I was thinking - that MLS is not a good source (I understand that is `old news` , anyway) and opportunities are difficult in BC, SK and AB - but opportunities are there if I keep looking consistently. I had a gut feeling that maybe condos would be a very challenging way to obtain the 10% goal. It is good to note the goal is a `rule of thumb` and it has been revised to 7-8%

 

[housingrental]

There`s some good info above
I`d add to it don`t compromise - 10% should be the minimum starting point - don`t accept less
If the area your investing in doesn`t allow for this look for:
A different area
How to add value to a property to increase rent rolll - where you can put in $XK and it be worth $X+YK more after and rent after updates is above the 10% of purchase price + reno costs