Rules of thumb VS midwest market

OP

Investor · Algonquin, IL · Member since 2020 · 23 posts · 4 votes

5y

That's what I'm thinking. 1% rule is achievable and most will cash flow. I have noticed townhomes near me tend to fit the 1% rule pretty regularly. Any thoughts on townhomes vs single family?

Greg ScottPro Member

Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes

5y

I can show you a house that sells for $10,000 that rents for $600 per month, which qualifies as a "6% rule". That said, I would never buy that house. In that neighborhood, you are likely to have your AC condensers stole regularly and have residents skip. You'll have a hard time making money there even though it looks great by that one metric.

Consider the investment holistically. What are the risks of that property and that neighborhood? What kind of cash on cash returns do you project, conservatively? Is the return acceptable given the risks?

Jaron WallingPro Member

Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes

5y

@Chris John "Armageddon would have to happen first, I think" HaHa!

I'm in the Indy market and finding the 2% is like a needle in a haystack. Hell even 1% is tough. Anything on the northside/Carmel/Noblesville? Forget about it.

@Steven Birch I'd vote against the Townhome. There's a reason you can make them work. They DON'T appreciate nearly as much, HOA fees suck, and generally people love apartments and SFH more. If you're desperate to get investing that's one thing, but don't get into a rush. The current market is pricey. In my opinion the majority of current home buyers are just buying, not investing.

Chris John

Member since 2020 · 671 posts · 937 votes

5y

I'd echo what @Jaron Walling says about townhomes. A lot of times the numbers look great, but once you start factoring in the HOA fees they look less good.

Also, not that anybody cares, but I wanted to name my twin boys Jarrett and Jaron, but my wife didn't, so Mason and Jackson they are...

3 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

5y

Forget the rules. What does your analysis say in actual dollars?

Daniel E.

Investor · Member since 2021 · 19 posts · 5 votes

5y

Hi Steven!

If you haven't already, I definitely recommend reaching out to wholesalers in your area and getting on their email lists. In my experience, finding a good deal usually comes down to finding a property in some sort of distress (either property distress or seller distress).

Currently, the housing market is very hot which makes it even more critical to buy correctly. I would definitely not go any lower than the 1% rule. I personally have been finding better value by investing in public REITs in the current market environment. You can still find deals but you are more likely to do so with connections to wholesalers. To get started you can just do google searches and find wholesalers in your area and sign up for their email lists.

Hope this helps and hope you find your first deal!

OP

Investor · Algonquin, IL · Member since 2020 · 23 posts · 4 votes

5y

Thank you all for the insight! I will reach out to some wholesalers and take the totality of the deal over rules of thumb. Cheers to a safe and prosperous 2021!

Misael Carlos Vera

Rental Property Investor · New York, NY · Member since 2020 · 100 posts · 93 votes

5y

@Steven Birch Check out the South Central Pennsylvanian market! If you look in B and C neighborhoods you can easily find 1.2% deals. If you low ball multifamily homes that have been on the market for awhile, you can even find 2% deals.

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Kenneth GarrettPro Member

Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes

5y

@Steven Birch

Forget all of those percentages. Those are guidelines only. The only thing that matters are the actual numbers as @Joe Villeneuve stated. As an example if the property cash flows at .80 then it's a good investment. It's your criteria. I wouldn't invest for me unless I can get $300 minimum preferably $400 for a SFR. Multi units I need $200 a door minimum, depends on the number of units, condition of the property, etc. It's all relative.

2 Reply

Brie SchmidtBusiness Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

5y

@Steven Birch - the 1% or 2% rule isn't any indication of how good or bad an investment is. It is just a ballpark "rule" to determine if you should dig into a property. It also varies by asset class, a 2% property in a C class area will cash flow less than a 1% property in an A class area. Proper due diligence and actually running numbers is what you should be doing.

I haven't seen a 1% rule in Chicago in years (north side and surrounding suburbs) and the 70% ARV hasn't been feasible since about 2015

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3 Reply

Henry Lazerow

Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes

5y

As brie mentioned those rules havnt been valid in our area since 2015 and arent a definition of a good or bad deal. Look for 2-4 units you can easily find these in suburbs that exceed 1%. Most of my suburbs clients focus exclusively on 2-4 units the single family have tiny cashflows or are in bad areas here.

2 Reply

OP

Investor · Algonquin, IL · Member since 2020 · 23 posts · 4 votes

5y

Thank You for the insights! Good to know I'm not the only one

Kwame Amoako

Real Estate Agent · Columbus, OH · Member since 2019 · 82 posts · 133 votes

5y

@Steven Birch

I wouldn't pay much attention to those rules, once you start underwriting properties you will know what works for you in that market. It important to also consider the areas appreciation.

OP

Investor · Algonquin, IL · Member since 2020 · 23 posts · 4 votes

5y

@kwameamoako

I will definitely do that. I've narrowed down my search in regards to area.

Ola Dantis

Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes

5y

@Steven Birch Hey Steven, I'd say stick to the rules but expand your map search area.

There are probably cities 1 - 2 hours away from you that might have met the 1% or 70% rule. If you are unable to find those in your state, then it is time to invest OOS.

BiggerPockets has plenty of people doing just that and doing it successfully. Good luck.

OP

Investor · Algonquin, IL · Member since 2020 · 23 posts · 4 votes

5y

The response has been great. Forgive me as I can't figure out how to "@" people directly for their responses.

John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

5y

@Steven Birch I have purchased a property as a buy and hold off market that met the 70% rule. It was a screaming deal, and it has also been one of the toughest deals to get straightened out that I have ever run into. I also have purchased properties that easily met the 1% rule and sometimes even the 1.5% rule. I have not seen a 2% property in my areas recently, although we did sell a SFR earlier this year that would meet the 4% rule... now if only you could collect rent.

The NW suburbs can be challenging as they are mostly large single family developments that are pricier homes that will never work as rentals. If you go closer to the city to the NW suburbs near the airport then you will start finding some cash flow. Nothing is easy right now as the inventory is low, but there are good properties out there.

Zachary Beach

Specialist · Los Angeles, CA · Member since 2018 · 291 posts · 231 votes

5y

@Steven Birch

Something to keep in mind with rules like 2% rule. Interest rates and bonds were double digits not 2-4% or .5 like now. Why invest in a house that’s not 2% rule if you can get a government bond or 10% and your loan is 15%. It’s also where the idea that paying off your mortgage was a good idea because it was guaranteed 15% return.

People now think 2% rule

Bonds are good investments

Pay off your mortgage

Those things where somewhat true but have long since become as outdated as riding a horse to work.

OP

Investor · Algonquin, IL · Member since 2020 · 23 posts · 4 votes

5y

Originally posted by @Zachary Beach:

@Steven Birch

Something to keep in mind with rules like 2% rule. Interest rates and bonds were double digits not 2-4% or .5 like now. Why invest in a house that’s not 2% rule if you can get a government bond or 10% and your loan is 15%. It’s also where the idea that paying off your mortgage was a good idea because it was guaranteed 15% return.

People now think 2% rule

Bonds are good investments

Pay off your mortgage

Those things where somewhat true but have long since become as outdated as riding a horse to work.

That's very true. Adapt or get left behind

Antonio CuccinielloPro Member

Investor · Austin, TX · Member since 2016 · 531 posts · 310 votes

5y

@Steven Birch Its hard to find areas that meet the 2% rule, but there are a few areas where the 1% rule is met. The only way to overcome that is finding a way to reduce your expenses. Which comes down to picking a place with lower property taxes, lower insurance rates, putting more money down on your mortgage, making your tenant pay for as much as possible.

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Jose Gallegos

Rental Property Investor · Bloomingdale, IL · Member since 2020 · 20 posts · 15 votes

5y

@Steven Birch

It's definitely more difficult to find good cash flowing properties right now. I just started investing in RE but I was able to find a really good cash flow property in near east side of Aurora. This is a solid C class property area. It seems, there's more deals to be found in these areas right now. A good portion of the stock would require some work though. So there's potential of doing a BRRRR

Best of luck on your search!!

John Woodington

Brooklyn Park, MN · Member since 2017 · 57 posts · 24 votes

5y

@Steven Birch I wouldn't totally discount the townhomes myself. We have a townhouse rental and it has been great. Appreciation may be slightly less than a SFH, but the argument that the dues eat into profits hasn't proven true for us. The association covers exterior structure insurance, lawn care and snow removal - all things I don't have to worry about for the property, or pay for. If the numbers work, a townhouse can be a great investment that doesn't take up much of your time if you get good renters in there. Good luck!

Crystal SmithPro Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes

5y

Originally posted by @Steven Birch:

Hi fellow BP members. I have been looking for my first investment property for approximately 4 months now. My goal/strategy is to buy amd hold for passive rental income while allowing equity and appreciation grow over time. However, I'm very handy with carpentry/construction and have the know how to flip if the opportunity presented itself.

I live in the NW suburbs of Illinois, 60102, and have been shopping the surrounding areas for the right investment. However, I've noticed that when the 2% rule or the 70% rule are applied to any of the properties in my area, the numbers just don't work. Even when I lower the 2% rule to a 1% rule, it's just not feasible. A 3 bed 2 bath single family near me rents about $1800 a month but costs about 220k.

My question to the group is whether or not the rules should be flexed to accommodate the area, or whether to stick to the rules because the right property hasn't come up? I know they're just guidelines but I'd love to hear opinions from those that have done it.

We've been investing for 20+ years as well as representing clients. We never used the 1 or 2% rule. I've nothing against the rule- just never used it. To your question on whether or not the rules should be flexed. The answer is the rule should be flexed to accommodate whatever Return on Investment (ROI) target you've established for yourself. That ROI could be a function of long term monthly passive cash flow or short term cash from flips.

I will say that you can find areas where the 1 or 2% rule works in Chicagoland- The question for you is would you be willing to invest in those areas.

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OP

Investor · Algonquin, IL · Member since 2020 · 23 posts · 4 votes

5y

Originally posted by @Crystal Smith:

Originally posted by @Steven Birch:

Hi fellow BP members. I have been looking for my first investment property for approximately 4 months now. My goal/strategy is to buy amd hold for passive rental income while allowing equity and appreciation grow over time. However, I'm very handy with carpentry/construction and have the know how to flip if the opportunity presented itself.

I live in the NW suburbs of Illinois, 60102, and have been shopping the surrounding areas for the right investment. However, I've noticed that when the 2% rule or the 70% rule are applied to any of the properties in my area, the numbers just don't work. Even when I lower the 2% rule to a 1% rule, it's just not feasible. A 3 bed 2 bath single family near me rents about $1800 a month but costs about 220k.

My question to the group is whether or not the rules should be flexed to accommodate the area, or whether to stick to the rules because the right property hasn't come up? I know they're just guidelines but I'd love to hear opinions from those that have done it.

We've been investing for 20+ years as well as representing clients. We never used the 1 or 2% rule. I've nothing against the rule- just never used it. To your question on whether or not the rules should be flexed. The answer is the rule should be flexed to accommodate whatever Return on Investment (ROI) target you've established for yourself. That ROI could be a function of long term monthly passive cash flow or short term cash from flips.

I will say that you can find areas where the 1 or 2% rule works in Chicagoland- The question for you is would you be willing to invest in those areas.

The monthly cash flow as a passive income isn't the end all be all. The ROI long term is where my interest lies. In regards to those portions of the city, those areas are outside the scope of where we're comfortable at this point.