Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes
Greetings,
I live here in the Los Angeles market and by no means expect to find any investment close to the 2% rule both on and off market. I have tried researching recent sales and cross matched potential rents in other markets and am not finding what I am looking for. BP show me proof.
If possible, can anyone provide an address of an investment (all inclusive) that they acquired and currently rent that met the 2% rule (or somewhat close)? Any market will do.
I understand if this is too sensitive to share but I think it would be helpful to show a real life example.
Investor · Fairfax, VA · Member since 2015 · 239 posts · 90 votes
9y
Nice question. In my experience on the east coast, this varies a lot depending on the local areas and we never see 2% unless it is off market and highly distressed. My firm actually does this analysis all the time, automated for our clients. In the Washington DC area, we do the math on roughly hundreds per day. Based on what I see:
DC: The very best are at 0.8%, unless they need tons of repairs or are Class C/ D. Class B are generally 0.7 or worse.
Northern Virginia: In NOVA- in 2015 we could get 0.8% occasionally, but recently, in the past year has been more like 0.7% for the best, unless they are far out exurbs. In Fairfax County for example, the best I see (discounting for condo fees) is roughly 0.75%. I will see rehabs at 1% sometimes farther out, which are good for investors with contracting experience or with a good GC.
Maryland: Very county dependent. The best you ever see regularly is 0.75% in Montgomery County. PG is more varied- it really depends on the area. You can get 1% or more in some markets (Class C/D) and in Anne Arundel you can get over 1%. But the vacancy/ collection loss risk can eat up these "paper profits" pretty fast, along with the older housing stock issues in general... which just run higher on maint.
Curious to see who, if anyone, hits 2%. Would be VERY impressed if it's not Class C/D.
Investor · Woodland Hills · Member since 2016 · 82 posts · 33 votes
9y
2% rule doesn't apply to LA market as matter of fact the whole Socal. You would lucky to get 1% on a investment property, unless you purchased the house off market from a highly motivated seller at a huge discount.
In past I held a townhome for 5 years, the cash flow was negligible but not negative - was just paying enough for PITI but I cashed in the appreciation last year. Will be in the market pretty soon for another similar investment property.
2% translates into 4.1 yr of purchase price to rent.... Long term national average is like 14 years, and cities like SF and NYC and Boston are around 25 years.... So LA is probably 22 years ish, I am guessing.... Go do the math, 22 years translates back into 0.4%....
Does not mean that you can't dig up the whole planet and find a deal like that... But it is probably in a place you can't find on map...
Investor · Fairfax, VA · Member since 2015 · 239 posts · 90 votes
9y
Nice question. In my experience on the east coast, this varies a lot depending on the local areas and we never see 2% unless it is off market and highly distressed. My firm actually does this analysis all the time, automated for our clients. In the Washington DC area, we do the math on roughly hundreds per day. Based on what I see:
DC: The very best are at 0.8%, unless they need tons of repairs or are Class C/ D. Class B are generally 0.7 or worse.
Northern Virginia: In NOVA- in 2015 we could get 0.8% occasionally, but recently, in the past year has been more like 0.7% for the best, unless they are far out exurbs. In Fairfax County for example, the best I see (discounting for condo fees) is roughly 0.75%. I will see rehabs at 1% sometimes farther out, which are good for investors with contracting experience or with a good GC.
Maryland: Very county dependent. The best you ever see regularly is 0.75% in Montgomery County. PG is more varied- it really depends on the area. You can get 1% or more in some markets (Class C/D) and in Anne Arundel you can get over 1%. But the vacancy/ collection loss risk can eat up these "paper profits" pretty fast, along with the older housing stock issues in general... which just run higher on maint.
Curious to see who, if anyone, hits 2%. Would be VERY impressed if it's not Class C/D.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Walter Roby jr This will echo @Diane G. but I've never seen one in a major metro area. When I have see anything close to 2% there's always a hitch, usually in the form of massive deferred maintenance. So "today" it will pencil out great but after replacing a roof and a few HVAC systems on a multiunit property the deal comes back down to earth. Not to mention that any deal outside of an easy drive for you is going to require a PM (knock 10% off of those gross rents) and you'll probably want to see it from time-to-time (factor in $1,500 a trip) and the lauded 2% deal -- for all practical purposes -- will evaporate. Not to say that others haven't found an off-market all-cash deal from an eager-to-sell owner but those won't show up non-disclosure states if you're doing your research there.
Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes
9y
@Sri Voodi I completely agree with 2% not applying to major metros. Was your town home covering some vacancy, pm, and capex Or strictly PITI?
@Diane G. I haven't compared markets by that metric but it is certainly interesting. Just for others to see how you arrived at those valuations you're getting the 4.1yrs=(1/(.02*12)). Substitue R for years of purchase price and N for desired cap rate, decide to solve for either R or N using the following formula(s): N = 1/(12R) or R=1/(12N). Thanks!
@Elizabeth Nourse Does your firm analyze projections or actuals (recent sales)? Sub Class C- properties are the only investments near 1% after repairs that I come across in my searches outside of major metros such as LA. I don't feel comfortable pursuing the 2% as I am not yet prepped to handle D like properties.
@Andrew Johnson"those won't show up non-disclosure states if you're doing your research there" Ah good point. I just researched the non-disclosure states and TX and NM are definitely in there. Both of which I was trying to analyze prior to.
@Joshua D. What city was that in, Columbus, MT? And how much did your initial valuation change from the landed/rented cost (like change from 2% to 1.8%)?
Investor · Woodland Hills · Member since 2016 · 82 posts · 33 votes
9y
@Walter Roby jr I was lucky that my town home was never vacant and I managed it myself. It did cover capex to an extent where my positive cash flow of 2 years was wiped out. As I said the cash flow was negligible. Good luck with your investing
When you get into Class C, C-, or D, you are taking on a full time job... It is NOT passive by any means any more.... That 2% profit is profit from a job, not profit on an investment anymore.....
If I bought the deal at market value today it would be like a .9% deal, but I to me its irrelevant as I did not pay that much. I guess I thought 2% rule meant What you paid for it, not what it is worth today. If that was the case all my properties are less than 1% deals. But I love having the equity capture in all my deals.
Real Estate Investor · North Ridgeville, OH · Member since 2016 · 97 posts · 81 votes
9y
25735 Lorain Rd
Unit 306
North Olmsted, OH 44070
I bought a condo for $14000 and it rents for $640 a month which comes out to 4.57%...
Keep in mind this is one of my best performing property and I basically was in the right place at the right time, but sometimes all it takes is luck.
116 Water St
Elyria, OH
I bought for $24000 and I get a combined $1100 a month which comes out to 4.58%... I love the Cleveland market. North Olmsted is a B+ neighborhood with good schools. Elyria is a C- neighborhood with OK schools. I also have another condo in Broadview Heights, OH that gets 2.3%, a SFR in Elyria that gets 2.1%, and a condo in Avon Lake that gets 2.6%. Broadview Heights and Avon Lake are A- to A+. Avon Lake is really a beautiful community and one of the nicest suburbs on the westside of Cleveland with truly excellent schools. Every property I have bought takes hours of painstaking research and work. Some were basically turnkey others took extensive rehab. I do a lot of the work myself and yes it's a job, but one I make good money at. My primary occupation is as a network engineer for a local company.
Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
9y
I have about 20 of them in a few rural communities in Texas with my worst just below 3% and my best currently 5%.
@Diane G. I see comments at least weekly that sub 30k and 2%+ rentals are in bad areas, C-D properties or in the Ghetto. This is flat out incorrect in many cases
Here is my 5%- 3/1 with central heat/air, fireplace and carport outside of Lubbock. Purchase $15,000 with current rent of $750
I currently have another on the same street under contract that will be 3%+
very interesting... i am very curious...can you share:
1. when was the $15K bought?
2. What would it be today?
3. Can you give some general idea of where it is? Thanks
1. Approx 1 1/2 years ago
2. Worth $40K range.
3. Lubbock TX area
This is just one example to illustrate the misinformation that jumps up often on BP that low dollar purchases are in C/D areas. I get that those of you in California cannot buy a parking spot for those numbers
Investor · Fairfax, VA · Member since 2015 · 239 posts · 90 votes
9y
@Walter Roby jr Good question. We use ARV projections versus asking list price on actively listed properties in our MLS. We do not include cost of repairs, therefore, properties in poor condition have artificially higher numbers than they do when you account for the rehab cost.
Real Estate Investor · Miami, FL · Member since 2013 · 474 posts · 214 votes
9y
Ok I will bite. Allllmost 2%.
3322 College St, Jacksonville, FL 32205
Purchase + Closing Costs - $30.5k
Rehab - $21k
Rent - $960
The above example was our best investment as far as rental yield. This was 3 years ago. It's in a very popular neighborhood that has gentrified tremendously. You can't find this deal anymore. (Not even close) We haven't raised rents on our extremely good, millennial tenants, but if it was on the open market I think it would get ~$1k.
I have seen many deals on paper that would easily exceed the 2% rule in rougher neighborhoods in Jax. I imagine they don't do as well once you factor in capex, vacancies, and repairs, but they were plentiful back in the day and still fairly common today.
Investor · Kent, WA · Member since 2015 · 624 posts · 274 votes
9y
@Timothy Tooker, that was the original intent - rent each room out for $450-$500 per month. But my PM said there's a demand for 5-6 bedroom houses so we decided to try the single family route. Got a tenant in 2 weeks after finishing rehab.