Hi
I know I probably seem dumber than blonde….but I can't seem to get the 11 second rule – I know how to do the calculation but am stumped as to whether the property asking price needs to be below or above the result you get in the caculation ieRent per Week: $400
Divide by 2: $200
Multiply by 1000: $200,000Should the asking price be more or less than $200,000?????
I thought the general rule of thumb when looking at a purchase price and deciding on how much to rent it for was roughly to knock the 3 zeros off the end and that will give you a rough guide as to what rent to charge – ie purchase price $400,000 so rent is roughly $400/week.
If that is the case, then none of the houses I look at will return a positive cash flow if the asking price is more than the end result of the equation ie – if the asking price for the home is $400,000 and I do the above calc. then I shouldn't pay more than $200,000 for the house??????
Does any of the above make sense?
If someone can give me a simple yes or no I would appreciate it.
Thanks
less than $200,000 the 11 second rule is designed to be a quick calculation to work out what purchase price will be a positive geared property. So less price than this means more positive geared. However the current property market doesn't have many positive geared properties.
I would work it out like this ! It in a long winded way .
Take the current interest rate say 7.5% as an example and a purchase price say $200,000
$200,000 * 7.5% /52 equals interest cost per week is $288 a week.
Add $40 a week for expenses
$328 per week so if rent is more than this it is going to be positively geared.
or reversing this method
Take rent- expenses per week *52 / (7.5%/100)
say for example rent is 340 a week
340 -40 for expenses * 52 = 15600
15600 / 7.5% = 15600 /(7.5/100) = 208,000 or less to be positively geared.What you need to be wary of is the current interest rate as it is coming down and this determines if positively geared.
I thought the general rule of thumb when looking at a purchase price and deciding on how much to rent it for was roughly to knock the 3 zeros off the end and that will give you a rough guide as to what rent to charge – ie purchase price $400,000 so rent is roughly $400/week.
You can't get more than market price for the rent."Yes" that's right you need the rent to be at least double the asking price i.e if the asking price is $100,000 a quick simple way is to take the first three numbers and double it so $200 rent then the rent needs too be a little bit upward of $200 to make it +PC.
But if it's a house that could have $5 spent on in for example on painting or some kind of improvements and the rent increased to 230 and you also negotiate the asking price down to $85,000. Then you will well and truly have a positive cash flow investment that puts money in your pocket each week after all expenses.
Some user friendly property calculators here that can help with knowing if you need to pay less or more and experiment with different scenarios to see how it changes the numbers.
http://www.forpropertyinvestors.com/property_feasibility.html
Not sure if you are aware but Steve has mentioned in his third book (from 0 to 260 properties in 7 years) that this calculation no longer works in the current market. His third book explains details relating to different market trends and the investing strategies for each market, whereas the first is designed for a market that is in the process of booming (and prior to a boom, as that was when Steve got in, back in 1999).
Recommended action:
- Continue to develop your education by purchasing the third book by Steve Mcknight (don't worry about the second one for now) and then compare the information in the book (especially the strategy coined 'the 3 second solution' which is the new version of this strategy) to the original book.
- Keep up the good work. It is good to see you are enthusiastic and are researching based on what you have learned so far. Well Done!
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