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Rules Of Thumb

Property Investment 101: Essential Rules of Thumb for Success

Take a tour through the unique rules used by real estate investors to assess potential investments and explore industry insider jargon.

Have you ever heard of real estate investing "rules of thumb"?

They resemble the industry's unspoken handshake; they are insider jargon. But don't worry; we're about to take you on a tour through these odd and humorous comparisons that investors use to swiftly assess possible acquisitions and make wise choices.

Join us as we explore some of the most widely used adages in real estate investing. Buckle up. We’ll go over every rule, from the 1% and 2% rules to the 70% and 80/20 rules. We’ll also talk about important ideas like the debt service coverage ratio, the 4% safe withdrawal rate rule, and the Rule of 72 for compound interest.

That’s not all, though. We will discuss some useful advice for calculating repairs, locating off-market bargains, and evaluating potential investments. These guiding principles may not be absolutes, but they provide investors a good place to start when deciding whether to give a property further thought.

With the 1% and 2% rules, let’s begin. In accordance with the 1% rule, a property’s monthly rent must represent at least 1% of its total cost, and in accordance with the 2% rule, it must equal 2% of the purchase price. These guidelines can aid investors in evaluating a property’s potential profitability rapidly.

To account for the progressive loss of value in a property over time, the 3% rule for predicting rental property depreciation is applied. The 4% safe withdrawal rate rule also aids investors in determining how much they may safely remove from their assets without depleting their portfolio when it comes to retirement planning.

Real estate investors utilize the 70% rule of after-repair value on cash offers as a rule of thumb to decide how much they should spend at most on a property that needs work. Based on the compound interest rate of an investment, the rule of 72 is used to calculate when the value of the investment will double.

Other quirky rules of thumb include the rules of 144 for compound interest with frequent periodic investments, 2:1 for innovative deal structuring, $50 for 30-year financing, 8:1 for showings and offers, and Future Dollars Today.

That’s not all, either. The debt paydown return on investment, the 2/3 rule for free and clear properties, the 1/3 rule for expenses, and the off-market deal discovery rule of thumb are all crucial to remember. Finding possible prospects can also be aided by using the motivated seller calls to transactions done rule of thumb and motivated seller postcard response rates.

Investors should also keep in mind Pareto’s rule, sometimes known as the 80/20 rule, which states that 20% of efforts produce 80% of the results. Also, it’s critical to comprehend the 1.25 debt service coverage ratio (DSCR) when looking for financing. Finally, investors should consider general guidelines for calculating repairs and deal analysis.

With all these tips and tricks up your sleeve, you can make better decisions and improve your chances of success in real estate investing. Now let’s get eccentric and explore the general principles!

1% Rule – This rule states that the monthly rent for a property should be at least 1% of its total cost. For example, if you purchase a rental property for $100,000, the monthly rent should be at least $1,000 to meet the 1% rule.

2% Rule – Similar to the 1% rule, the 2% rule states that the monthly rent should be at least 2% of the purchase price. For example, if you purchase a rental property for $50,000, the monthly rent should be at least $1,000 to meet the 2% rule.

3% Rule for Estimating Rental Property Depreciation – This rule is used to account for the gradual loss of value in a property over time. The 3% rule estimates that a property will depreciate 3% per year. For example, if you purchase a rental property for $200,000, you would expect it to lose approximately $6,000 in value each year due to depreciation.

4% Safe Withdrawal Rate Rule – This rule helps investors determine how much they can safely withdraw from their retirement savings without depleting their portfolio. The 4% rule suggests that investors can withdraw 4% of their portfolio’s value each year without running out of money in retirement. For example, if an investor has a $1 million portfolio, they could safely withdraw $40,000 per year.

70% Rule of After Repair Value on Cash Offers – This rule is used by real estate investors to determine the maximum amount they should pay for a property in need of repairs. The 70% rule suggests that investors should not pay more than 70% of the property’s after-repair value minus the cost of repairs. For example, if a property’s after-repair value is $200,000 and it needs $20,000 in repairs, an investor should not pay more than $130,000 (70% of $200,000 minus $20,000).

Rule of 72 for Compound Interest – The rule of 72 is used to estimate the time it will take an investment to double in value based on its compound interest rate. For example, if an investment has a compound interest rate of 6%, it would take approximately 12 years (72 divided by 6) to double in value.

Rule of 144 for Compound Interest with Regular Periodic Investments – Similar to the rule of 72, the rule of 144 is used to estimate the time it will take for an investment to double in value based on its compound interest rate, but it assumes regular periodic investments are made. For example, if an investor makes monthly investments into an account with a compound interest rate of 8%, it would take approximately 144 months (12 multiplied by 12) for their investment to double in value.

2:1 Rule of Creative Deal Structuring – This rule suggests that for every two creative deal structures presented to a seller, at least one will be accepted. For example, if an investor presents two different offers to a seller for their property, one offer with seller financing and one with a cash purchase, there is a higher likelihood that one of the offers will be accepted.

$50 Rule of 30-Year Financing – This rule suggests that for every $10,000 borrowed over a 30-year period, the monthly mortgage payment will be approximately $50. For example, if an investor borrows $100,000 over a 30-year period, the monthly mortgage payment would be approximately $500.

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