Steve McKnight’s 11 second rule can be used to quickly find out if a property is likely to be positively cash flowed or not. I will teach you how to use this 11 second rule as well as some extra things you need to think about when doing cash flow calculations.
The 11 second rule is fondly called the 11 second rule because…you guessed it…it takes just 11 seconds to complete. It is should not be used when making serious financial decisions. Instead, it is best use when searching through hundreds of properties to quickly cancel out properties that have little to no chance of generating a positive cash flow.
How To Use Steve McKnight’s 11 Second Rule.
Step 1: Take the purchase price of a property (eg. $300,000)
Step 2: Chop off 3 zeros (eg $300,000 becomes $300). Note: This is the same a dividing by 1,000
Step 3: Double that number (eg $300 becomes $600)
If the weekly rental return of the property is equal to or in excess of that number then it is likely you have a positive cash flow property on your hands.
However, if the weekly rent falls well below that number then the chances are you are looking at a property which will be negatively cash flowed.
A more detailed example (working backwards)
Imagine a house or a unit is rented for $150 per week. After applying Steve McKnight’s formula, this should be the outcome:
$150 (rent) divided by 2 is $75. This amount is later multiplied by 1,000 equating to $75,000.
This means that the maximum amount that is to be invested on the property should be equal or less than $75,000.
Formulas like this shouldn’t be regarded as an absolute rule of thumb. It’s more like a guide to finding good investment properties amongst the slew of options in the market. Hence, investors shouldn’t immediately buy the properties that meet this criterion without doing their due diligence.
Note: If a property exactly fills the 11 second rule criteria it will have a rental return of 10.4%
When to Use this Rule
Everyone always wants to get his or her money’s worth. For investors to gain security amidst the risk of purchasing property, making use of the 11-second rule can be done in these situations:
1. When Searching For Property
Investing in property can easily become emotional. This little formula will help keep you even tempered and will stop you purchasing an investment that doesn’t fulfill your financial objectives.
It helps you cut the crap out of your potential investment pile before you even have a chance of getting emotionally attached to it.
Even if the property is practically eye-candy because of its location and pizzaz you must not jump into impulsive buying mode. Weighing the financial side of things is very important in building a stable income through real estate investment.
2. When Deciding What To Offer For The Property
Calculate a property’s supposed selling price according to the rule, and then consider using this amount as your offering price.
Stating an amount backed-up by a required rental return is certainly better than naming a price that you just pulled out of your ass
This formula can be effective in helping sellers see things from your point of view, thus helping both parties reach an agreeable purchase price.
Indeed, there are risks involved in spending a lot of money on a single property, but with the help of this simple equation, investors may minimize their risks and come closer to purchasing positive cash flow property.
To make things easier, we have a Gross Rental Yield Calculator which is completely based off Steve’s 11 second rule. It’s completely free and web based. Just punch in your numbers and it will tell you if it passes the test or not and it will also spit out the annual expected rental yield.
Tools for calculating cash flow accurately
There are a few tools out there for calculating the cash flow of your property effectively. Most are quite expensive and hard to use.
That why I created Property Tools. A online calculator that allows you to quickly and easily estimate the cash flow of any property in seconds.
Simply enter purchase price and rental income to get an initial estimate, and then go into more details on each expense item to get a more accurate result.
Hand’s down the easiest way to calculate positive cash flow properties
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