Should I adhere to the 1% rule in a low cap rate market???

7 Replies

In a market like southern California where the cap rates are for the most part under 5% it has been very difficult for me to find any type of MF property that meets the 1% rule (rents being at least 1% of purchase price).

Should I just keep looking until I find the needle in the haystack or are there other criteria that is more important when trying to invest in a cash flowing buy and hold investment property? 

You will find that Ca is a tough market to cashflow.  It has appreciation, but that is a tough pill to swallow on a daily basis, just waiting for the payout.  

You may want to consider out of town investing.  

You aren't going to find the 1% rule in SoCal. If you do, that's a red flag in itself and you'll want to explore the reasoning. Honestly, if you find something in SoCal that hits 0-5% caps, I'm impressed. Where are you finding anything in the positive?

Adjust your expectations to what your market offers.  One of the biggest mistakes people make is trying to force a strategy on a particular market instead of identifying the strategies that already work in that market.

I agree with @Russell Brazil California is not going to give you properties that meet the 1% rule.  As long as you have realistic expectations and focus on total expected return instead of other value metrics that don't work everywhere you should find a property that suits your needs.

You should only go fwd w/ a deal that makes sense to you.... there's so much that make up these numbers it's impossible to tell you if you should go fwd w/ a rule of thumb. But generally speaking the better the paper returns the more cautious you should be, more so if it hits MLS.

@Ellis Hammond So let's be practical for a second...

1.) There are plenty of people (and investors) with money in Southern California.

2.) Most investors would love to invest close to home.

3.) Most investors would kill for a 1% property in Southern California.

4.) If the unicorn does reveal itself, will you be able to compete?  Given...

     4a.) Your investor competition will likely bid the price over asking.

     4b.) Your investor competition can likely to an all-cash quick-close deal.

So even if you do find the needle in the haystack do you think you have the means to pull the deal across the goal line?

I'm not trying to be overly negative, just focusing on the pragmatic side of things.  I personally think that most people who invest in Southern California are banking on appreciation (land value and rent increases), want an asset they can drive by versus fly to, are willing to self-manage and get to save the cost of PM, and Prop 13 at least stabilizes property tax costs so 20 years from now the investment performs much better on the ol' spreadsheet.  So there are plenty of reasons to invest in Southern California but I don't know that immediate cash-flow is one of them.

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