1% rule minimum criteria?

Question

Been on this forum and already have found a wealth of information. This is similar to a post I had yesterday but I have been listening to quite a few podcast and forum post, I keep hearing about the 2% rule and having the 1% rule as a minimum. My question is being from Socal where it is almost impossible to find a deal that meets the 1% rule even neighboring areas like Vegas where it is getting to that point. My question is it not even feasible to invest in west coast property if we are following this rule. I almost thinking I am forced to invest in outside states. Whats your thoughts and experiences following the 1% rule

Fay Chen · Answer

I own a SFR in Pomona. My friend runs a student housing business, so he's leasing it from me. Sort of like a triple net lease, where I get a guaranteed free cash flow every month. I'm looking to acquire a couple more properties, but haven't decided the location. Now I'm leaning towards TX...

Fay Chen · Answer

Try Palmdale, San Bernardino, Beaumont. Try duplex, triplex & 4-plex. Maybe not in the A & B neighborhoods, but they are still out there.

Brent Seehusen · Answer

@Fay Chen I agree with you there.  I've found a manager for my recent duplex purchases that I've been happy with so far.  I'm going through my first turnover right now, so we'll see how that goes, but so far so good.  I also have a property in OC that is self-managed.

How about you?

Fay Chen · Answer

@Brent Seehusen, I find the biggest challenge is not finding the property that fits in the 1% rule. It's finding a good management company. Do you self manage?

Chris Nguyen · Answer

thanks for giving me your inputs. Those are definitely some very good points.

Ali Boone · Answer

Sure. And the caveat is that these are only my reasons why I am not currently interested in Vegas, I can't speak for anyone else. Also, anytime market fundamentals change, I'm always up for reevaluating my stance and possibly changing my mind. So my current thoughts are just based on today's observations and could always change later.

One of the main reasons I am not a huge Vegas (for investing) fan is because of the extremely homogenous economy, which is primarily centered around the service and gaming industry. This leaves a lot of risk for economic volatility. Think of Vegas in 2009 during the crash. How many people stopped gambling? A lot. The other factor with Vegas only having one primary industry is employment. Vegas currently has the highest unemployment rate of any large US metro area in the US, and has held strong on their unemployment numbers for quite a few years now. And of course, employment is one of the main factors in any market when it comes to real estate.

Vegas has been a pretty big focus for appreciation-driven investors in the past few years because of how much their housing prices have been skyrocketing. One downside to the now-higher property prices is that they are starting to exceed the affordability of the median income of Vegas, which means primary homebuyers are being priced out of buying houses now. Selling to primary homebuyers is a huge exit strategy I like to keep as an option because of the financial gain potential.

And then lastly, Vegas just doesn't offer as high of returns or as many market benefits, and to me has more risk, than other markets around the US.

Again, all just my own assessment and why I won't buy there. But plenty of people do!

Brent Seehusen · Answer

I agree with @Fay Chen.  If you look at multi's in the outlying areas you should have no problem finding something that hits 1%.  You'll have to make a judgement call as to whether you feel comfortable managing in those areas, but they are out there.  I've been able to hit 1.9-2% on my last couple of purchases (both duplexes in the high desert).

If the inland strategy doesn't appeal to you, it's also possible to occasionally hit 1% with town homes or condos in LA, OC, and SD counties.  I've found some that looked promising in Long Beach and Oceanside.  The 1% properties in OC were in neighborhoods that I didn't feel comfortable with, lacking in pride of ownership.  A lot of times the HOA's have deferred exterior maintenance which is a non-starter for me.

I'm not saying it's easy, but I don't think it's as impossible as many BP newbies make it out to be.  Mostly I would advise doing lots of online research on different areas and pretty soon you will have a good feel for what's possible in these different markets.

Chris Nguyen · Answer

Thanks for the reply. I was actually looking into Vegas, Can you give me reasons why you stay away from there.

Ali Boone · Answer

You're pretty much right. Not only is the 1% rule next to impossible to hit here, hitting anything positive when it comes to cash flow is. For sure in SoCal, but even the neighboring west coast states as well. Vegas used to have good numbers (but I'd argue against the market itself for other reasons) but even those aren't as much anymore, and AZ used to have them but those are gone too for the most part unless you are able to find the occasional diamond in the ruff. SoCal though, 1% isn't a thing. If you go quite a bit further out you might be able to find positive cash flow, but it won't be super high and there are other risks to CA when it comes to buy and holds. Flipping and buying for appreciation are your better bets here. Otherwise, I'd encourage you to look at other states. I live in LA and none of my properties are on the west coast, for all those reasons.

1% rule minimum criteria?

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