How Real Estate Investing is Like Tinder and The 1% Rule
In my conversation with Lane Kawaoka, who is an out-of-state passive real estate investor, he gave a very interesting analogy as to how he decides whether or not to invest in a specific deal. In order to be as objective as possible, he looks at real estate investing like the dating app Tinder!
When presented with a deal, the first factor Lane looks at is the rent-to-value ratio. Using Tinder lingo, if the property has a rent-to-value ratio of 1% or greater, he swipes right, which means it passes the eyeball test and he is willing to take a closer look. However, if the rent-to-income ratio is less than 1%, he swipes left, which means that it isn’t up to his strict investing standards. For example, if he is looking at a property that is listed for $100,000, if the rent is $1000 a month or higher, it passes. If it rents for less than $1000 a month, he swipes left and moves on. Lane estimated that he swipes left on 50-75% of the possible deals he is presented with. For example, people bring him properties that are listed at $250,000 and renting for $1500 a month (0.6% rent-to-value ratio). Even though the $1500 a month in rent is tempting, he would rather stay in his market (Seattle) for that rent-to-value ratio.
If the property passes the rent-to-income Tinder test, then Lane will get advice from his team on the ground, which is his real estate agent and property manager. He will provide them with the property address and they will do a drive by, looking at both the property, but more importantly, the street. Lane has a lot of faith in his people on the ground because he did his homework, due diligence, and cross checked references in order to make sure he found the best of the best. Therefore, if they say that the property and surrounding area looks good, he has the confidence to put in an offer. But just to be safe, Lane always puts in an appraisal and inspection contingency, so if something is very wrong with the property, he can get out of the deal.
But what about running the financials before putting in an offer?
When Lane first started off, he spent hours and hours running the numbers in Excel spreadsheets. He has an engineering background, so he geeks out on that type of work. However, he realized that he was getting too bogged down by the spreadsheets, which resulted in overkill and a disproportionately lower amount of results compared to the amount of time he was spending staring at Excel. Flash-forward to the present, and Lane assumes that he will collect 70% of the rent after expenses, excluding the mortgage payment. For example, if a property rents for $1000 per month, Lane assumes he will collect $700 after expenses. The typical property he purchases has a mortgage of about $500 per month. Subtract that out, and Lane cash flows $200 per month, which hits his magic number.