BiggerPockets

Madison Heights is not a war zone or gangland. It's safe to walk down the street at night by yourself. Detroit is a nightmare. Lots of crime, no police response, etc.

Check out Warren, MI. You can buy a three bedroom house for $10-20K that will rent for $700-800. It's not a war zone. Lots of property crime, but little violent crime. Every third house is abandoned. The problem is the government. They are a gestapo and require ridiculous inspections and permits. It's not even worth buying there anymore. Great deals if you can put up with government abuse.

The problem here is that the 2% rule is simplistic. It makes assumptions about what operating expenses will be that are, more often than not, inaccurate.

You need to learn Capitalization rates if you are going to get a little more sophisticated. 2% ROI per month would work out to be a 24% cap rate if there were no expenses-- but some operating expenses are inevitable. The problem is, of course that those operating expenses can run up to 50% of the gross income which brings your cap rate down to 12% which is good, but not great. If the properties are truly without operating expenses (again, unlikely) a 24% cap rate is fantastic.

Cap rate= Annual NOI/purchase price. 10% is good, higher is better. If you are not finding properties in this range you are either not looking hard enough (don't do bad deals just because you cannot find good ones) or you are in an over-heated market where fix-and-flips might work but buy and rent probably will not. That said, in the most over-heated market there are good rental deals out there but you may need to reconfigure the property in some way.

That said I just bought a 2/1 condo with a 42% cap rate. Even after I split with my investor partner he will get 21% ROI (no debt) and I will make $4,200 per year. All in all not too bad. Beautiful apt. in good neighborhood. REO not long on market.

Lots of those deals out there in my area.

Oh, by the way, one last thing. Whenever the newbie says "there is absolutely no way to get a deal that . . . . " it is not true. While I am encouraging you to get a little more sophisticated in your analysis I would bet that there are 2%/month ROI deals out there in your market. They are not going to be easy to find. And when you do find one you may need to move quickly. But just because you looked at 50 and didn't find one doesn't mean they are not there. The good news is as you do this more they somehow become easier to find, mostly because you learn how to reject the duds more quickly.

It's supposed to be. It's meant to be a 30 second analysis that snaps your head to attention if you find a property that meets or beats the rule.

I think 2% deals are possible, just difficult to find.

Michael.. I agree that garages converted to apartments, even efficiency's are a great way to get to 2% however we have learned the hard way that sometimes you have to jump through hoops to get the proper permits. We bought a house with a large 2 story garage on an extra lot. We had to re-zone the parcel to pout the two units in it we wanted. It has its own electric and we paid to have water& sewage put in. A neighbor fought us all the way because she didn't like rentals because she had one of her own right next door to her house and had a bad experience. Took a couple of months to drag through it but we got what we wanted. Still a work in progress, but hope to turn it into a good $maker son

I can definitely attest to the fact that the 2% and 50% guides do work but you need to those markets that are suited to these parameters. They are not rules as has been stated but do reflect some basic realities. I invest in Dayton Ohio because these guides do not fit my local market and what I a seek is current income from cash investments. I can buy properties that rent for $600 a month for under $30,000 in non war zone neighborhoods in the city. Most properties that need rehab will be in the 2 to 3 bedroom 1000sq foot range with taxes and insurance under 1400 per year. Most cash prices are in the area of 15,000 with 6,000 in rehab. The problem is that there is no resale market at this time. Most sales are cash investors with little retail activity. Dayton is not unique in that there are markets similar to this across the rust belt and i am sure in many other parts of the country.

@Jon Klaus, I have though about seller financing I am concerned that I may be trading a risk of eviction with the risk of foreclosure. your post however has me thinking.

Mark Reynolds - although I agree with your statement that the "2% rule is simplistic", I have to disagree with your understanding of the 2% rule otherwise. You see, the 2% rule is GROSS rents, not NET rents, so it has nothing to do with ROI - it just says that gross rents should be 2% of acquisition costs (and it pays no attention to actual expenses either, as you pointed out),

Suzie, I'm about 90 miles north of you. There's 2% property all around you.

You seriously have to stop this! I am checking to see if I can set up an alert for all J. Scott postings just to get a laugh, but I'm afraid I wouldn't get anything else done. That is hilarious - and yet - somehow spot on too!

Chris