3% Rule Possibilty

23 Replies

Hi BP, 

I have noticed a lot of discussion on 2% rule here at BP. I am wondering if it's possible to get even 3%. 

Is there anyone getting 3%? I am curious to see if it's achievable. To be more precise, we are not talking about D areas (war zones) or run down (trash) properties. 

Any response it appreciated.

James Syed, Real Estate Agent in IL (#471018522)

In order to do the calculation, I always include rehab.

Example 1 - I purchased a property for $23,000 and I had to put about $1,600 into it for rehab and it rented at $875/month.

$875/($23,000 + $1600) = 3.56%

Example 2 - I purchased a property for $21,000 and had to put about $2,500 into it.  It rented for $750/month.

$750/($21,000 + $2500) = 3.19%

Example 3 - I purchased a property for $16,000 and had to do $200 in repairs to it. $100 was for a handyman and $100 was for materials. It rented at $725/month but subtracting out the HOA the net rent is $536.50/month.

$536.50/($16,000 + $200) = 3.31%

@Dawn Anastasi

Thank you for valuable advice especially on repairs, Dawn. 

I have learned a lot from you and Brandon Turner since I have joined BP and it's the best platform for people who are interested in real estate. All of us owe a huge one to Josh Dorkin (founder of Bigger Pockets) to create this wonderful networking website.

And thank you for the 3 examples that you have given, they assist a lot. 

James Syed, Real Estate Agent in IL (#471018522)

@James Syed 

1.  Bought property for $32,000 rent $950.

2.  Bought property for $12,500 rent $750. (2013)

3  Bought property for $3,000 rent $275. (2013)

4.  Bought property for $30,000 rent $2,050.

5.  Bought property for $36,000 rent $895. (2013)

6. Bought property for $34,000 rent $1,250.  (2014) 

@David Krulac
If you don't mind me asking David, I'm curious which city or cities you are investing in to get those kinds of returns. Impressive :)

@James Syed Yes. I have done it also. It is possible but not common. I even have one rental that is 7%. 

Happy Investing!

One factor many miss in this rule is that it does not have to be on purchase day to meet or beat the rule. Often times, it is the forced appreciation through repairs,upgrades, and defend maintenance combined with better management and lower expenses to increase NOI. That does not happen on day one, but down the road. At purchase, it could be a 1.6% but after all is stabilized and repaired!MIT could turn into a 3%.

Do they exist and are they possible? Of course, hence many examples above, but note that each and every one of them are for properties purchased below $40k. Get into properties above $100k and such examples will be few and far between.

@Laura Williams  

 mostly PA.

@James Syed 

#2.  The $12,500 property I mentioned in the Bigger Pockets Podcast #82.  Its in my Tenant Self Management Program (TSMP) whereby I give a 25% discount on the rent, but the tenant takes care of all minor maintenance and utilities.  On this property the tenant cleaned, painted, even installed laminate flooring, without compensation from me for either materials or labor.   Fixed up the property would rent for $1,000, so the tenant is saving $250 a month by paying less than market rent.

#3.   The $3,000 property is a vacant lot, where somebody else has their mobile home and pays $275 rent per month. 

#5.  Was cleaned and painted.

#6.  Was cleaned and painted.

@David Krulac   Those numbers are impressive.  How difficult was it to find these types of investments out in PA?  

Originally posted by @James Syed:

Hi BP, 

I have noticed a lot of discussion on 2% rule here at BP. I am wondering if it's possible to get even 3%. 

Is there anyone getting 3%? I am curious to see if it's achievable. To be more precise, we are not talking about D areas (war zones) or run down (trash) properties. 

Any response it appreciated.

 I have gotten 3% twice, but it's rare. Both were in poor neighborhoods but not a war zone.

1. $10,000 short sale duplex the gets $1300 in rent.

2. $11,000 REO SFR that get $975 in rent.

Yes the houses are in the inner city of Milwukee and I am not getting shot at or robbed. My tenants have decent jobs and do not tear up my property.

I am getting 8% or 9% on one but it is an exception.  Singlewide trailer I bought from the occupant (sister of the owner) when I bought a farm because it couldn't really be moved.  Fixed it up fairly nice and rent it for $650.  It isn't the best be not trash property either.  I want all my properties to be ones I would live in.  I stayed in worse when I was working a remote job in North Carolina. 

Thank you members for all your advices. I am confident they will help me get a good grip on this strategy / matter. Especially @Will Barnard  you have come up with something I have never considered and I believe it's very creative. 

Keep learning and investing.

James Syed, Real Estate Agent in IL (#471018522)

I've had as high as 8%, which was a 4 unit purchased for $28k that rents for a total of $2,250/month.  I pay water and trash though so I'd reduce the gross rents by $200-250 so $2000/month puts it at 7.1% of the purchase price.  Of course you'd also want to subtract your initial rehab costs because that's part of the capital investment. On this one I spent  $18k to do the 4 units so now that number is down to 4.3%, which I still consider to be a very good return.   It was a low income area but I have great tenants in place (I've never had a late payment and still have my original 4 tenants over a year later).

Make sure you're looking at all the numbers and costs before you start worrying about percentage of gross rent when analyzing a deal.

You could do that here in the ATL pretty regularly in 2012 if you knew where to find deals. Pretty hard to do that now, though, but I wouldn't say it's crazy far out of line if you buy wholesale in the right area.

Originally posted by @Patrick L.:

I've had as high as 8%, which was a 4 unit purchased for $28k that rents for a total of $2,250/month.  I pay water and trash though so I'd reduce the gross rents by $200-250 so $2000/month puts it at 7.1% of the purchase price.  Of course you'd also want to subtract your initial rehab costs because that's part of the capital investment. On this one I spent  $18k to do the 4 units so now that number is down to 4.3%, which I still consider to be a very good return.  

 You can't count it at 8% if you had $18,000 in rehab costs.  In that case you'd have to automatically count the rehab as part of the equation. 

If you didn't count the rehab then you could buy places for $1.00 that needed $100,000 in renovation and rented for $1,000 per month.

David: you should never have given out that info. I forecast WAVES of BP members moving in for the kill:)

In SW Florida, these days 2% is rare unless you are buying very low end properties. I have friends achieving 2%, even 3%. I don't buy the lower end units and don't get those kind of returns. I added a new unit to my portfolio on 8/20 and expect to get 1.25% after rehab. Though not high, the ARV on the property is over 110K and I should be all in under 80K so down the line I do expect a nicer return. I debated a quick flip but that didn't appeal to me because I prefer buy and hold investments.

John Thedford, Real Estate Agent in FL (#BK3098153)

@John Thedford  

Good thinking

but I already wrote a book where I detail what I did in 270+ deals, so its already out there for anybody who has the book.   But there are those 600 or so deals NOT in the book, what could they be about?

Welcome to BP.

I just came across a 6 Unit Building that we might be able to purchase at 3% rule. About a year ago, we thought it was impossible.

James Syed, Real Estate Agent in IL (#471018522)

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