After years of acquiring and investing in single family rental homes, I recently purchased my first apartment building. Here is the breakdown of my first apartment building purchase to provide some valuable insight if you decide to make the leap into multifamily investing. Backstory My partner and I wanted to expand and grow our portfolio. We decided to branch out into multifamily. Our criteria was 40-unit buildings and above because, in our eyes, it takes the same amount of work to acquire one large apartment building as multiple duplexes or triplexes, etc. Plus, with the right infrastructure, it’s easier to manage one building, in a single location, versus units spread out in different areas. Acquisition There’s this pocket near the south side of downtown that has been pretty run down for quite a while. Everything around the location is prime. I’ve driven it over the past couple of years and kept my eyes on the two apartment buildings right across the street from each other. At the time, one of the buildings had been vacant for quite a while. The other was a pretty run down “mom and pop”-owned building. Prior to this deal, we established local relationships with brokers and contacted sellers directly to find off-market deals. I happened to notice more recent renovations on the vacant building. Then I drove by the other one and noticed it was in distressed condition, as mentioned. I went to my laptop to research and noticed it was previously listed at $1.4M on LoopNet, but got taken down. I contacted the seller directly by tracing his information from the public records, which I found through a simple Google search. He had recently sold a couple of his other properties and was looking to transition from being an active landlord to a full-time debt collector. That’s a good sign of a motivated seller! We spoke briefly, during which he stated that a previous deal fell through and recommended we speak with his sister, who was brokering it. He was also adamant that “if you’re not willing to put $50k down for earnest money, don’t bother with proceeding with the deal.” Underwriting After speaking with the broker, I asked for the rent roll and T-12. The T-12 breaks down the actual income and expenses of the building over the last 12 months. We determined that in order to make this deal work, we needed to be near $1M for the purchase. Based upon the T-12, our cap rate was 7% at the current 50% occupancy rate, but when repositioned, we’d be closer to 10-11% cap rate. Negotiation After determining what we would pay, we shot the price over to broker. We started low. I believe it was just $600k. The seller countered at a much higher figure. During this time, my partner and I reached out to a few investors—including Gino Barbaro and Matt Faircloth, as well as other local people in the multifamily space—to get extra sets of eyes on the deal. With our infrastructure, the numbers would work at a significantly higher price. Our mistake was underwriting the deal too conservatively. We came up on our offer to $900k and went under contract. The seller was interested in carrying back a portion of the purchase price, which was good for us. We only needed to put down $200k. Inspection During our inspection, we had the inspector walk ALL of the units, which was good but unnecessary in my opinion. That was our second mistake. It is a must for the investor to walk all the units, but not necessarily the inspector. The report was 80+ pages and repetitive when it came to detailing each unit. It was good to learn this lesson, though. In conclusion, the report showed the building needed work, but nothing too alarming. The biggest thing was configuring out the decks and balconies so they would sustain themselves and guiding water from the property. Renegotiation Nobody wants to labeled as a “re-trader,” but in our scenario, once we ran the numbers, we were cash flow negative. The first couple of months were at the current interest rate to seller, and our term of one year was too short. Jake and Gino recommended we get that extended. They also threw out the idea of interest only. We posed the terms to the seller and ended up settling on 3% the first year, 5% the second, and 7% third year with a 3-year balloon payment on a 25-year amortization. Work Needed We wanted to give the place an entirely different look and feel. We started off by changing the signage and name after acquiring the property. We plan to address the exterior of the property  first, along with upgrading and renovating other aspects of the property. Everything else we have quoted in the scope of work here. Our in-house GC helped with that. Contracts We decided to outsource our laundry to Coinmach with a 90% us/10% them, split after they get the first $14 per machine. The laundry brings in approximately $400 per month. We’re not looking to make too much money on this. It’s essentially something nice we want to provide for our tenants. We’re still considering some type of cable provider as well. In Conclusion Despite starting the deal in October and not closing until April, it was a great experience. It’s always exciting to dig up great deals—and it’s even better when they close. We learned a lot, including how to save on inspections, the best ways to structure seller financing deals, and the great value to be found in working with others on BiggerPockets. Have you tackled your first multifamily deal yet? Any questions about this property? Let me know with a comment! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! 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What’s the #1 skill you should acquire as a real estate investor? I would argue it’s learning how to accurately value a property. “Buy low, sell high” is the core success formula in real estate investing, but in order to buy low, you need to know how to evaluate high.   So, this guide will explain, step by step, how to do a quick and dirty estimate of value for single family or other small residential property. Commercial or larger multifamily properties are not covered here because they require a different process. Why Not Just Hire an Appraiser or Agent? You might argue that some appraisers and real estate agents are experts at valuing real estate. Why not just outsource this job to them? Appraisers and agents ARE a key part of your team. You should certainly depend upon experienced and knowledgeable professionals for help and guidance. But each and every day, you should be looking at dozens of potential investment deals if you hope to find the best ones. Can you ask an agent or appraiser to evaluate every one of those for you before even making an offer? No. It’s impractical and too expensive. You need a quick and dirty valuation process of your own. And even when you do hire an expert, can you afford to completely depend upon someone else for one of the most important calculations of your business? I like to do my own quick and dirty valuation on a property, and then I’ll compare my calculation with the appraiser or agent’s value. Most of the time, my estimate is similar to the expert’s. But happily, the expert sometimes teaches me new and helpful insights. And every now and then I find the expert is wrong.  And as an  investor, being wrong hurts because it loses money. So, this guide is ultimately about asking the right questions. It’s about learning the basics of what experts are doing. And it’s about making and keeping more money as an investor by learning how to think critically for yourself. Let’s get started! Quick and Dirty Valuation in 3 Steps The quick and dirty process of valuation is a shortened version of something called the sales comparison approach (SCA) to real estate valuation. The SCA is a process real estate brokers and appraisers often use to estimate value by comparing and contrasting one property to others. Investors often buy fixer-upper properties, so this quick and dirty valuation gives a starting point to understand the potential value of a property, which is also called the after repair value (ARV). For experienced investors with a lot of history in a neighborhood, this quick analysis might be all you need to make a decision. For inexperienced investors or someone new to a location, it might just be the first step before getting help from others. Here are the 3 steps: Gather information on the subject property. Gather information on comparable properties. Compare comps and subject in order to estimate value. I’ll unpack and explain each in the next sections. Step #1: Gather Information on the Subject Property The valuation process begins with the subject property. This is the property that you are trying to estimate a value for.   Related: Your Complete Guide to Analyzing a Property in Just 10 Minutes In my world, the subject is usually an opportunity to make an offer on a property. It may be a property listed on the MLS (Multiple Listing Service), or it may be a seller who contacted me directly from a referral or from one of my marketing campaigns. Other times, the subject is one of my existing properties. For example, this may happen when I’m considering selling a rental property. The key to this step is gathering accurate information about your subject. You will be comparing it to other properties in step #3, so you want to have a good basis for comparison. Here is a list of some information you will want to gather, although it’s by no means all inclusive. I’ve separated them into broad categories to make them easier to remember. Location: City/municipality? Inside or outside city limits? Neighborhood? School district? Proximity to attractive amenities (like a lake, ocean, park, cultural center, etc.)? Proximity to obnoxious things you can’t change (smells, loud noises, power lines, junky neighbors, dangerous dogs, etc.)? Lot: Size (acres or square feet)? Fenced yard? Corner or interior lot? On busy road? Major slopes? Mature or non-existent landscaping? Building/House: Size (square feet)? # of bedrooms, baths, garage? Type (house, condo, townhouse, etc.)? Style (bungalow, ranch, modern, etc.)? Year built? Condition? Finishes (i.e. hardwoods versus cheap vinyl, or granite counters versus laminate)? Much of the location, lot, and building information will be included on the MLS info sheet from your agent. MLS sheets also usually have helpful photographs so that you can see features with your own eyes. Here’s an example: If the property is not listed or if some information is missing, you can also search other sources like your local tax assessor, Zillow.com, or a Google search. While Zillow is not as comprehensive as the MLS, it’s very user friendly and can often get the job done. Here is a screenshot of property information on Zillow. I also like to see the property myself before estimating a value. No matter how sophisticated online real estate sites become, most house buyers make a decision to buy after they’ve had an in-person, emotional connection with a location and with a house.   So, it pays to replicate that buying decision with boots on the ground as often as possible when you are estimating value as an investor. When I visit a property, I bring a checklist with me that includes all of the subject property information listed above and more.   I also take as many pictures and videos as possible. Both of these help me to remember everything for later comparison. Step #2: Gather Information on Comparable Properties Once you’ve gathered information on the subject property, you can then start searching for and filtering the best comparable properties (a.k.a. comps).   Related: Looking to Invest Out-of-State? Here’s How to Pick and Analyze a City To start, where do you find the comps? The best source is almost always your MLS through a local real estate agent or appraiser. A professional agent or appraiser will know how to apply filters that you give them to get good comps. If you are not a real estate agent yourself, you’ll need to get one on your team who is willing to send over comps regularly. If you are using a buyer’s agent for purchases, this would be a reasonable request. As an aside, lack of access to MLS, especially early in your career, might be motivation enough for you to get your own real estate license. It’s a critical resource as an investor. If you must do the searching on your own without the MLS, you may still be OK. I often use sites like Zillow.com for quickly pulling sold and active comps. Its maps and search function are very user friendly, and although it may not be as up-to-date or comprehensive as the MLS, it still has a large number of comps you can use for this quick and dirty estimate. If you’re going the non-MLS route, let me explain the process to pull and filter comps on Zillow. The first method is to enter the subject property address on the home screen, press continue, and then click “expand” to take the property to full screen: On the right side of the page, find the list of “Nearby Similar Sales” and click on the link “See sales similar”: You’ll now see a screen with a map and a list of similar sold comps. Zillow chooses these for you and tells you how each comp is different from your subject. Using this map, I usually write down 5-10 comps on a section of a deal worksheet that I will use later when I visit the comps in person. The comp section of my worksheet looks like this: An alternative method to collect comps is to start on the Zillow.com home screen and click “Buy” in on the top menu bar:   You’ll now see a map of your given area, plus filters at the top that let you narrow down your comps. First choose only “Recently Sold” in the Listing Type pull down menu:   Then choose your other filters, like bedrooms, baths, home type, and others in order to narrow your search: Whatever source you use (the MLS, Zillow, or other online databases), you want a big list of comps (at least 5-10) that meet some basic filtering criteria. You don’t want every property in town, but you also don’t want to filter so tightly that you end up with no comps. So here are the first filters I use as I collect comps: Sold properties: Ideally, I want sales in the last 3-6 months. Same location: For suburban properties, this often means the same neighborhood. For urban or in-town properties, it might be the same block or district. For rural properties, it might be a certain distance from the subject (<1 mile). This is where the map function in Zillow comes in handy. Most MLS databases allow you to search by a variety of location filters, like distance from subject, school districts, zip codes, census tracts, cities, and others. Same size: Square footage should be within 15-20% of the subject. Non-distressed, traditional sales: Unless most sales in the market are distressed or investor purchases, I want to ignore distressed (bank owned, foreclosure, etc.) sales for comparison. I also want to ignore seller financing sales or other sales with unusual seller concessions. Gathering this information is not always obvious, but indications can usually be found in the MLS in the description and in the photos of the property if it’s obviously vacant and needs work. Same # of bedrooms and baths: Sometimes you can fudge on these criteria, particularly the number of bathrooms. If you’ve used the first four filters and you don’t have enough comps, it might be OK to include 1, 2, and 2.5-bath homes, for example. Remember, the goal of this step is not to find a comp exactly like your house (that’s almost impossible). Instead, you just want to find a group of comps that share the most common, broad criteria listed above.   Now that you have a list of filtered comps, it’s time to take the list and go visit them in person. Often, I do this on the same trip when I visit the subject property. In both cases, nothing replaces the experience of evaluating the property on the ground just as a buyer would. If you’re in your car, be sure to slow down, roll down the windows, or even get out and walk the neighborhood. Get a feel for how a user would experience this property and this location. You’ll pick up many more factors in person than you could behind a computer. If you must stay behind a computer at this stage, take full advantage of Google Maps Street View to tour the neighborhood. But keep in mind that the images may be out of date. The photos from an MLS listing or Zillow will be another important resource for you if you can’t visit in person. Related: 4 Simple Steps to Successfully Analyzing a Real Estate or Note Deal As you look at each comp, take notes on your worksheet. Ask yourself while physically in front of the property if it is better or worse than the subject. And write down why. Be sure to circle or make special note of the 3-4 comps that are most similar to your subject property. For now, just write down your initial reactions. In step #3, you will use this and other information to get a quick and dirty estimate of value. Step #3: Compare Comps to Estimate Value This is the step where all of your previous work comes together.   If this were not a quick and dirty analysis, you would now make some very detailed adjustments. You would estimate the value of each feature of a house (like a garage, a deck, a fireplace, etc.), and you’d add or subtract from the comps to try to compare apples with apples. A very good explanation of this adjustment process was written by BiggerPockets author J Scott and is available in the BP Fileplace. But because this is a quick and dirty valuation, you can be a little less precise. If you need it later, you can do a more detailed analysis or get professional opinions. Your goal with this process is to achieve an upper and a lower limit of value. You want to discover a range within which your subject property will likely fall. So, look at the information you collected about the subject property (step #1) and your list of comps (step #2). When you drove by the comps, were you able to identify 3-4 properties that were most similar to the subject? If so, get a scratch piece of paper and make a chart like this:   Your job now is to think like a potential buyer of these houses. You want to “shop” among your choices and decide which are best and which are worst. To do this, compare your subject property with this short list of 3-5 comps. On each comp, compare all of the location, lot, and property criteria you have available. Then ask yourself this question: “Is this comp better or worse than my subject?” Once you make that decision, in the margin of your chart simply put an up arrow next to a comp that’s better, a down arrow next to a comp that’s worse, and a sideways arrow if it’s too close to call. I also like to put a + or – next to the features that make each comp better or worse. The chart with analysis might look like this: If you’ve found the right comps that only differ by a few variables, you should be able to make a decision about which comps are better or worse than the subject. For example, if property A sold for $130,000 but its only significant difference was one less bathroom, you might say the comp is worse than the subject. And if property B sold for $120,000 and the only significant difference was its poor condition, you might also say the comp is worse than the subject. And if property C sold for $150,000 and the only significant difference is the larger square footage, you might say the comp is better than the subject. The example above is simplified for ease of explanation, but the point is the same no matter how many comps or criteria you compare. The process is to continually narrow down the window of estimated value of your subject property by choosing better and worse comps. In the example, I could say with some confidence that the subject is worth more than $130,000 and less than $150,000. So a reasonable quick and dirty estimate of value could be $135,000-$145,000. If you are using a fix-and-flip formula to make an offer, you could plug in both ends of your value range to see what number you need to buy at to make your minimum profit. If you are buying rental properties, you can use this quick and dirty formula to make sure you don’t overpay. You can also build in a discount if that’s part of your rental purchase criteria. In the end, the entire point of the process was to get you to a rough estimate of value more quickly and less expensively than alternative valuation methods. It will be your job to figure out how and when to use it in your investing business. It’s All Guesswork (But That’s OK) You’ve made it through the 3-step process! But before we end, I want to explain something very important about estimating values. Real estate valuation is always just an educated guess. Even the best appraiser, broker, or investor in the world can’t perfectly predict the future. And that’s exactly what we’re trying to do. We’re taking past market information, and we’re projecting that information into an unpredictable future. Markets can and do change very fast. We’re also dealing with properties that are completely unique. No two properties or locations are exactly the same. So unlike the stock market, where one share of Coca Cola is exactly like another, we’re always comparing apples to oranges to some extent. That doesn’t mean the valuation process isn’t important or useful. Both our quick analysis and more detailed valuations are VERY important and EXTREMELY useful. But just remember as an investor to keep a healthy dose of humility and skepticism when it comes to any value estimates, appraisals, and CMAs from brokers. You can’t let this keep you from taking action, but you can build that healthy skepticism into your psyche and into your business systems. How do you compensate for this uncertainty and still move forward in your investing? As I recommended above, use ranges of values instead of exact numbers. Make the bottom number something you are very confident in, and then ensure you can still make an acceptable profit at that lower number. You might also want to have a Plan A, Plan B, and Plan C on your deals. If you can’t get your price, can you sell lower, cut your losses, and move on? Can you rent the property and wait patiently until the market gives you your price? If Plan A (the optimistic, rosy picture) is the only way you can survive, you’ll get into trouble eventually. You might also want to build a margin of safety into every deal. Warren Buffett’s mentor Benjamin Graham wrote in his excellent book The Intelligent Investor: “If you were to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” A margin of safety in real estate means to buy below the true value. But the trick with Warren Buffett or with any of us is that true value is illusive. It’s always an estimate. So building a margin of safety helps to compensate for this lack of certainty by giving us some room for human error. And finally, never forget to HUSTLE on every deal! If you’re confident of the after repaired value of a flip, then move quickly, get it fixed up, and take it to market fast before things change.   Or even if things go badly, keep hustling. Entrepreneurs always make mistakes, including with their estimates of values. I remember many times where I’ve hustled my way out of mistakes and kept moving forward. You can too. Conclusion: Go Practice! The best way to learn anything is to practice. Reading this article is theory. The REAL thing is taking the concept and applying it in the real world. Related: How I Do My Real Estate Math (Accurately) in Just 10 Minutes So, I challenge you to go do some quick and dirty valuation of properties on your own. Use your own residence. Use some leads on new deals. You could even test yourself by using recently sold houses as your subjects. Don’t look at the sold price yet. Just go through the entire quick and dirty valuation process on each property, and then see how closely you come to the actual sold price. Valuation is not a skill you can master overnight. Appraisers and brokers take years to become experts at this craft.   But you can become competent with this quick and dirty estimation process. And by applying it strategically and regularly, you can quickly become a value expert in a very small slice of your overall market. You can become the person who knows more about your niche than anyone else. And that niche expertise will translate as much as anything else into successful real estate investing. Good luck with your quick and dirty estimates of value! And good luck with your future investing! [Editor’s Note: We are republishing this article to help out our newer readers.] Investors: Do you have a quick and dirty valuation process that you use? What steps do you take? How do you get confident in the values of the properties you will buy? I look forward to having a discussion with you in the comment section below. Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

You want to get started in real estate investing, but your local market seems tough. Is it time to look elsewhere for opportunities? Probably! If so, when and how should you start investing from afar? And in which other markets should you be looking? The Challenges of Getting Started in Real Estate Investing It can be challenging to get started in real estate investing—even during the best of times. It can seem even harder in some markets and some phases of the market. Those who succeed are those who realize that the best time to start is now, and find a way to do it in the face of any challenges. Real estate investing may appear especially difficult if: You are in a declining market Competition is incredibly high You have very limited resources Property prices are very high Conditions may be discouraging if you are in a high-cost market, with the average home priced at more than a million dollars. Fierce competition to land deals doesn’t help, either. What’s worse, the market might seemingly be declining at the same time, yet you still don’t have the cash on hand to even put a 20 percent down payment on one property.  But don’t give up! There are workarounds—even in these conditions. Related: Looking to Invest Out-of-State? Here’s How to Pick and Analyze a City When Does It Makes Sense to Invest Out of Your Area? There are opportunities everywhere, all the time, if you can be creative and are willing to work for them. However, there is also a lot to be said for investing with common sense, going where you can get the volume of deals you need, ROI on your time and investment, and geographic diversification. Just because you can do a deal locally, doesn’t mean it will offer the best return—especially not for the amount of work and risk required. If you can find better value with better returns and lower risk in another city, then it’s definitely something worth exploring. At a minimum, you have a responsibility to yourself to get the best results you can, even if you have no one else relying on you. If investing elsewhere seems intimidating at first, consider doing a couple of deals close to home, and then make up the volume by investing out of state in a more affordable destination. You might find you can pick up dozens of rental apartments in another city for the price of just one home down your street. That diversification can help balance your portfolio for the long run, too. Also, if you are in a high-priced area that may have peaked, it just makes sense to look to markets that are at less risk of taking a deep dive right after you buy. Otherwise, you’ll find yourself in that new car situation, where you can lose half your money as soon as you drive off the lot. You’ll always be upside down. Where to Look & What to Look for It remains true that cheaper isn’t always better. So just because a market has a lot of properties available, doesn’t mean it is better, either. Here are some of the factors you need to consider: Basic economic fundamentals Affordability of housing Price to rent ratios Direction of the market How much diversification you can get for the dollars you have Degree of investor friendliness Related: 4 Must-Haves When Investing in Out-of-State Rental Deals How to Evaluate a New Market Obviously, it is optimal if you can visit new markets yourself and be the actual boots on the ground instead of finding others to serve this role for you. It will give you a much better feel for what is going on and the value you can get in the area.  But if you don’t want to be flying all over the map for months, running into dead ends, then begin your research online. Electronically connect with real estate professionals local to the market you’re looking—or pick up the phone and call them. BiggerPockets is a great free resource at your fingers tips to help you locate these people. Travel once you have created your shortlist.  After that, test the waters. Invest, evaluate, and repeat. The Bottom Line It can be frustrating and discouraging to get started in real estate if you are in a tough market in a rough part of the property cycle. Don’t give up though. There are opportunities if you look and are creative. Yet, you may find it far easier and more profitable to at least temporarily engage in other markets. It’s all about the numbers. Where will you get the most value, take on the least amount of risk, and find the volume you need to hit your financial goals? Considering investing elsewhere? Have you chosen an area? Have you visited? How is the process going for you? Share your experience or questions in the comment section below!   Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

Well, I have been on the road for four days now. With two kids. In the Tesla. WITH TWO KIDS. Oy vey. We’re headed to Arizona. Gonna see what’s what! Couldn’t be any worse than Ohio, right?! In the meantime, I do try to find time once each day to take a look at BP, see what’s going on, who’s making waves. I have to tell you — with me mostly gone, everything sure does seem to be rather quiet and uneventful. Go figure. 2% Rule I did come across something that triggered somewhat of an intellectual gag reflex. People are still talking and writing about the 2% rule as if it’s anything at all. It is such nonsense and such an easy target, I can’t help myself. Let’s Do Some Math Let’s take a 2% SFR, where the house can be purchase for $40,000 and rented out for $800. Since $800 is 2% of $40,000, we refer to it as a “2% house.” Now, even if purchased without leverage — which you will most likely need to do because most lending institutions don’t want to lend small amounts under $50,000, and most don’t like the asset class — there will still be expenses, right? You know what those are, and, let’s just say in the interest of keeping things simple, that expenses are 50% of the income, or $400/month. Related: Case Study: My Latest Deal Proves the 70% Rule Doesn’t Always Work If we annualize this, we realize that in exchange for a $40,000 investment, we would cash flow $4,800 per annum: $400 x 12= $4,800 What About the Sale? Well, typically these houses do not appreciate — which, by the way, is why banks aren’t excited to lend on them. So, best case scenario, you sell it for the same amount you bought it for — that’s the best case. Further, in order to sell, you will have to rehab it, which will cost you at least as much as your entire cash flow for the year. So the best you can hope for in the year you sell is just to get your money back. In a bit, we will build an IRR model to compare the investment and cash flows of two assets, but for now let’s just switch gears. The 1% House Here, we’ve bought a house for $100,000, and it brings in $1,000 of rent, which represents 1%. If we assume the same expense ratio of 50%, we are left with cash flow before debt of $500/month. Unlike the other house, however, this asset class is easy to mortgage, and thus our investment will be only the 25% down payment, or $25,000. Naturally, since we will have to carry a mortgage, at, let’s say, 5% over 30 years, we will have debt service of about $400/month. And thus, the only cash flow on this house will be $100/month, or $1,200 per annum. The exit on this house,will look very different from the 2% house, however. Why? Because this is a desirable appreciating asset, which can be sold to an owner-occupant. So, let’s just assume an exit of $140,000 in five years. And, by the way, in this five years, the tenants will pay the mortgage down from the $75,000 we started out with to $69,000. The IRR Model Look at this table: Yes, the cash flow seems stronger on the 2% house. But let’s consider what happens in Year Five: 2% House Presuming the best case scenario of actually getting a full $4,800 of cash flow but no appreciation, the exit CF would be $44,800, right? But in order to sell this house, you’ll have to remodel, which will eat the entire cash flow, which is why I show $40,000 in this line. Related: Put to the Test: Are the 2%, 50% & 70% Rules REALLY Useful to Investors? 1% House We start out with a sale price of $140,000. Adding in one year’s worth of cash flow of $1,200, subtracting remaining debt of about $69,000, and subtracting another $5,000 for rehab prior to sale, we arrive at distributable to you of $67,200. Conclusion I know this is very crude. I am not trying to give a math lesson, only to paint a picture with broad strokes. But which one looks better to you — 10% IRR or 25%?! The unspoken problem in the 2% asset class is the tenant quality. It’s true — your economic losses will indeed be higher in this asset class. You will likely have to turn units more extensively between tenants. You won’t be able to raise rents, and as such, will need to absorb higher LTL (loss to lease). You will be dealing with older assets as well, and there are additional costs involved with this. All and all, I need to caution you that the 2% scenario I outlined is really very rosy; it will likely not be as good as that. Do you use the 2% rule when analyzing properties? Have you found any real estate rules to hold validity? Let’s talk in the comments section below. Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you