We have built a small empire on one simple rule. And that simple rule is my “30% Rule”. What is the 30% Rule you might ask? Well, let me give you some background of how the 30% Rule was created.
You see like many people starting out in real estate I watched all of the YouTube videos I could find and I was a big supporter of Bigger Pockets. The Bigger Pockets podcast is absolutely phenomenal. They have great insight into many topics of real estate investing. However, one topic that I could never understand was how they evaluated a potential property as a rental property.
When we realized that acquiring rental properties was the way to build wealth, of course, we had to figure how to evaluate a potential rental acquisition. We bought a few homes and quickly turned them into long-term rental properties. We evaluated all of the numbers and we tried to run them against what Bigger Pockets were saying. They used terms like the 1% Rule, the 2% Rule, CAP Rate, and tons of others. I’m a simple guy from northeast Mississippi and I just wasn’t getting. Then I realized that they are buying homes traditionally. You know, getting a mortgage and the whole nine yards.
By now you should know that we don’t buy homes with money. So, the Bigger Pockets way of evaluating and buying homes wasn’t going to work for what we do.
So here it is…we buy homes “Subject-To” meaning that we take over mortgages and pay them directly in the name of the seller. We don’t have all of that upfront financing cost amongst other fees like realtor commissions and such. The simple formula is to take the mortgage payment, which already includes the principal, interests, taxes, and insurance, and multiply that number by 1.3. Yep, that is it!
By multiplying a mortgage by 1.3 or 130% of the mortgage, I am adding in a 30% profit monthly vs what I have to pay the mortgage. Example: a mortgage cost $1,000 a month x 1.3 equals $1,300 (rent from tenant). If when we are evaluating a potential purchase we estimate to see that there is at least a 30% spread from the mortgage to what we can get in rent. If there is at least 30% to be made, I’M BUYING THE HOUSE!