11 Second Rule

[muppet]

Hi Guys

Time for a new topic to discuss.

I have come across the 11 sec rule on another forum. Some people appear to use this rule to quickly evaluate a property they may be looking at to see how financial the deal may be.

Now the 11 sec rule states that you take the weekly rent/by 2 and x by 1000 = the price to pay for an ip that will give you about a 10.4% return.
eg $200/2 x 1000 = 100000. This being what you should pay for the IP.

I have noticed that 95% of the IPs being found and offered by ESC, Hybrid and Hotinvestmentproperties are not reaching this percentage.

If the interest rates continue to increase, yields will continue to get lower and lower. Investors will rely more and more on their tax refund to make a profit from their IPs.

Basically the small towns around the country seem to have the best deals.

Comments please.

Regards

[inzvestor]

negative gearing

'Investors will rely more and more on their tax refund to make a profit from their IPs'


So what you are saying is that people will be negative gearing as there are no positive cashflow properties?

[LeanneS]

A yield over 10% isn't what it used to be - they used to be all over the place (when interest rates were over 10% as well). There are a few of them but often in quite rough areas so you pay for it in the long run.

[Marcus]

Muppet,

When I first started shopping for my first IP's, one of my criteria was that for every $50k PP spent I would try and get $100pw in rent as I knew this made the property CF+ Pre tax. I had no idea then someone had made it a rule. lol :P
I recall Kieran commenting on this topic somewhere but have been unable to track it down. A pity as he covers it well mentioning Dolf de Roos 1.6 rule which is similar.

It has remained in my list of criteria but not part of the “Must fit” list. More the flexible part that can be moved/sacrificed/changed depending on market conditions and/or other circumstances that may justify such changes.

I am not surprised the properties listed through property sourcing teams are struggling to meet the “11 sec rule" considering the current market conditions. If you are chasing these types of properties I could point you in the direction of some in a town not far from where I live. But personally, I wouldn’t touch them with a 30ft barge pole! They fit into the NO BUY areas part of my list.

Regards,
Marcus

[kieran]

Marcus,

I recall Kieran commenting on this topic somewhere but have been unable to track it down

You have a good memory!

Here are some of the comments I have previously made on another forum about the 11 second rule:

This "11" second rule is the OLD Lowball rule! It's been around for many years and is pretty useless unless you want to accumulate properties in small towns (or you buy in a property Slump)!

All of these quick "rules" can be equated back to a yield. Take a look at the varied purchase prices you get when you use these simple rules to calculate a purchase price as follows:

The 11 Second Rule or Lowball Rule
Take 50% of weekly rent x 1000 = purchase price
If rent is $200 p/w x 50% x 1000 = $100,000 purchase price (i.e. 10.4% yield)

And I have seen other "classic rules" too, like:

The Golden Rule
Rent = min 1.4 x interest cost
If rent is $200 p/w = $10,400 then Golden Rule says pay max of $106,122 (i.e. 9.8% yield)
i.e. $106,122 x 7% int = $7,428 x 1.4 = $10,400
Obviuosly this purchase price will adjust either up or down dependant on what interest rates are at the time of your calculation.

The 1.6 Rule
Weekly rent x 1000 divided by 1.6 = purchase price
If rent is $200 p/w x 1000 = $200,000 divided by 1.6 = $125,000 purchase price (i.e. 8.32% yield)

How many properties in the major cities fit the 11 second solution?
(I would be surprised if many do in this market!). And the downside of the 11 second or lowball rule is that if interest rates are 10% you are still buying negatively geared!

Good luck with the 11 second solution because a 10.4% yield in this market will probably only buy you high risk in a small town!

Out of all of these rules I like the golden rule best because it takes into account interest rates but even thats a little unrealistic in this hot market.

I am of the firm opinion that the best calculation is to consider annual rent and then deduct ALL cash expenses (assuming you have to borrow 100% of the purchase price interest only). If there is a surplus of cash after ALL expenses then it is positively geared and if not it's negative. You should ALWAYS make sure it is AT LEAST positively geared if your intention is to simply rent it out long term (i.e. not flipping or doing up to sell etc). Using this equation you will need a yield at present of @8.5% at present (with interest rates @7%) but if int rates increased to say 9% then this will mean you will need a yield of @10.5%.

[beama]

2 for 1 rule

The rule I know of is the 2 for 1 rule which means if a property is for sale for $100,000 then it must return at least $200 pw, very much the same as the 11 second rule.
I personally do not buy a property if it doesn't meet this rule.

Just to add I recently purchased a property in a nice area of ChCh that meets this rule and is CF +.

Go the ABs
Beama

[cube]

Rules of thumb

Hi,

The 11 second rule can still be useful, if only for comparison - the closer you get, the better the yield. We use it for comparing a $160,000 3 brm box renting for $280 -vs- a $375,000 Home and Income getting $600. The 11 second rules says that the first should rent for $320 and the second $750, so its easy to see which is closest.

At present, with interest rates 7-7.5%, we look for an absolute minumum 8% with 2 weeks vacancy (rent * 50 / price ). I carry around a chart of the figures, and most agents think I'm vary organised, having all the figures at my finger tips. That's just before I tell them that, to me, their 'Mid-High 200s' property is worth $215K, based on their assessment of the potential rental (which one assumes will be $10-$20 optimistic)

Happy hunting.

Cube

[drelly]

I understand the appeal of rules like these and must admit that I have used them in my own calculations before. However, I agree with Marcus.

In my (admittedly limited) experience the great majority of IP's that fit the 11 second rule are going to be in bad areas with correspondingly lower capital gains in the future.

I have changed my focus somewhat from placing a lot of emphasis on cashflow to more on the properties' potential. Don't get me wrong, I still look for the best CF I can get but there are issues of quality that are just as important as the number crunching.

The CF may look good on paper IF you can get someone to live there!

What is the point of having a 10% cashflow on a couple of $100,000 properties if you are going to miss out on the likely higher capital gains on a single $200,000 that returns a respectable 8.5%?

And on a personal note... I enjoy dealing with nice places in nice areas!

[muppet]

Hi Drelly

Welcome to the forum.

Nice to have an old posting/topic resurface.

The CF may look good on paper IF you can get someone to live there!

I get good CF with my all except one of my properties and they are in good areas in two cities and one town and there has been no difficulty getting good tenants.

The properties in the two cities are showing good CG but the ones in the towns are not. However they are showing the highest CF which will help when my income when I am ready to borrow again.

Regards

[orion]

Steve McKnight used this 11 second rule in Ballarat, a small town an hour or two out of Melboune where the houses he was looking at were around $60,000 - $80,000. You would not use this rule in large cities with low yields, or even smaller cities these days. These type of rules are not to be relied upon for investing in any way. Prices can vary greatly just within a few streets in cities depending on their location, so trying to make a rule to fit all investment properties is not going to help you greatly. It was a guide for properties Steve was looking for at the time in a certain price range in a certain location.

Yields are really only a guide and generally vary from city to city. They are not a true indication of a cash on cash return, and then when you take into account P&I loans as opposed to interest only, this brings in other factors as well. I don't look for properties neccesarily based on yields, just good sound rentals in reasonable locations that people want to rent. The last few rentals/rents that I have been purchased are as follows: -
Purchase price $168,000 - Rent $260p.w. 3brm home Havelock North
Purchase price $151,600 - Rent $240p.w. 3brm home Hastings
Purchase price $67,000 - Rent $160p.w. 2 brm flat Hastings.

Regards
Graeme Fowler

[RodC]

Hi Graeme,

Ballarat is more than just a small town, it's population is about 80,000 which makes it the 3rd largest city in Victoria.

You are quite correct though, Ballarat has moved on since then. Those properties which were available for $40-60K a couple of years ago are now around $100-120K. Rents, of course, haven't moved anywhere near the same amount.

regards,

Rod.

[orion]

Hi Rod,

Thanks for that, cheers.

Graeme Fowler

[Glenn]

At the risk of being frivolous again, the maket is making mathmatics real simple thee days. The average investment property in Nelson is now down to 5%. So all I have to do is add three 000 's to the weekly rent and that is what people should pay. Not that I am buying at this rate only selling. A commercial real estate agent mentioned that he has recently sold an industrial property at this rate. Nothing to fall in love with a rotten old factory with wonderful views. Despite all the experts saying paying off mortgages is a lost cause at least the rate of return on you principle repayments can not be lower than 8% or what ever you pay. No risk returns of 8% sound pretty good to me.
Glenn

[drelly]

Thanks for the welcome and replies.

Graeme, thanks for those examples too! I was really interested to see what sort of CF you would regard as acceptable. I'm assuming that you bought those properties on interest only as they wouldn't be +ve CF on P&I if you include rates and insurance? They are very similar in CF the my places so at least I haven't completely screwed up! hehe...

This actually leads me to another question... when to start paying off principle?

I have three rentals with a total value of $373k. Total debt is $356k. My own home will shortly be mortgage free and is worth roughly $160k. Here's the breakdown...

$130k 3 bed house - $210/wk
$141k 3 bed house - $220/wk
$102k 3 bed house - $185/wk

I've heard the school of thought where you don't actively try to pay off principle and just buy until you've reached a certain goal but possible increases in interest rates and the belief that principle paid off is equity to purchase with is turning me that way. I figure that I can probably pay off another $30k in principle over the next 12 months if I work at it. By the way, I intend to continue buying this year as well. Probably 2 more properties.

What are your thoughts people

[orion]

Hi Drelly

Dear oh dear oh dear, where do I start??
It's not quite time to bend over, grab your ankles ...... etc yet, but if I was in your position, I wouldn't be buying any more properties for now. Admittedly, my risk tolerance is very low, maybe yours is a lot greater than mine.

To keep this brief, I will just share just a few thoughts on your situation. If you want anything expanded on, let me know.

what sort of CF you would regard as acceptable

Your cash flow for those properties is fine.

I'm assuming that you bought those properties on interest only

No, I do not have any properties on interest only. Have mentioned this elsewhere with the reasons why, just not sure where. You could do a search on the other posts I have done to find it quickly.

I have three rentals with a total value of $373k. Total debt is $356k

That is only approx 5% equity in these properties. Fortunately your own home is almost freehold which is great. What would happen though if the market price of your properties drops by 20% sometime in the next couple of years?

Getting wealthy in property is not usually done overnight, especially when you are just starting to learn. There is lots to learn and one big mistake many beginning investors make is over leveraging themselves, and when interest rates rise, house prices dip, you have vacancies or lose some of your income from elsewhere, you could get into serious difficulties. It is fine to do this in a rising market and think you are doing really well, but unfortunately by the time things start going the other way, it may be too late with many people panic selling. To me, property is a get rich slowly strategy, and a strategy I use is to be constantly paying off principle, therby giving me more equity. This subject is huge in itself - and doesn't suit some investors, but as I say - I am fairly conservative.

Not sure if I have helped in any way, so let me know if you want me to go into more detail on anything.

Regards
Graeme Fowler