Show me your 2% rule
Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes
Show me your 2% rule
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Investor · Fairfax, VA · Member since 2015 · 239 posts · 90 votes
9yNice 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.
76 Replies
- Real Estate Investor · Los Angeles, CA · Member since 2014 · 236 posts · 67 votes9y
Originally posted by @Ruth Bayang:
Almost 2% south of Seattle, WA
809 120th St S, Tacoma
Purchase $135,000
Rehab $10,000
Rent; $2,600 per monthCan you introduce me to your property manager? PM me please!!
- Real Estate Investor · Los Angeles, CA · Member since 2014 · 236 posts · 67 votes9y
Originally posted by @Greg H.:
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%+
I'd love to know more. Can you introduce me to your property manager?
- Rental Property Investor · NY · Member since 2013 · 844 posts · 350 votes9yDiane G. Your statement about it being a full time job is incorrect I get maybe 1 maintenance call a month from my 2 family. $42,000 purchase $1500 monthly rent 3.5% rule I also have several single family homes above the 2% rule and I spend more time doing my books then anything else.
- Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes9y
Originally posted by @Diane G.:
If the Tenant could buy the whole house with 3 years rent, why would he rent in the first place?why won't he just buy?
Good question!
- Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes9y
@Bill Pate These are fantastic. On the properties requiring extensive rehab, have those turned out to higher yields?
@Greg H. What type of neighborhood is Lubbock (A/B)?
@Ruth Bayang Nice job! How did your pm come across the deal?
@Maxwell Lee What demographics drove you to invest those neighborhoods?
- 9yPatti RobertsonBusiness MemberProperty Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes
Here's my latest hold. Closed on it a few weeks ago and already have a tenant accepted and SEC 8 package submitted.
1345 E Tanners Creek, Norfolk VA - 3 bed/2 full bath townhome in a POA @ $75/month. Bought at an on-line auction for $70K. Only work needed is to replace a stolen AC unit and stain a small area of the fence. Rented it the first day of advertising it for $1350.
- Real Estate Investor · North Ridgeville, OH · Member since 2016 · 97 posts · 81 votes9y
@Walter Roby jr it has been kind of a mix. I have only had three that required extensive rehab. I am a value investor, so I look for properties that I calculate will return at least 20% ROI per year. My worst performing property is my first one. That house I did over 40K in rehab and I make $60 a month. I became a landlord out of necessity, but I realized two things. I live in just about the cheapest real estate market in the country and chances are prices will never be better than they are right now in my lifetime. So, I decided to use my competitive advantage(thanks econ 101) to make calculated investments. My first property was turned into a rental out of necessity because I tried to sell it in 2007 when I got married. It sat on the market for over a year with no offers. I put it up for rent and it rented in two weeks. It's a small two bedroom cottage and one of the bedrooms doesn't have a closet, but it makes a great rental. After some quick math and one failed attempt to buy a condo I have bought 6 rentals in 18 months. Paid cash for all of them and the worst performing property is 12.5% ROI and the best is 40%. Math doesn't lie. I use math as my distinguishing factor when I decide to invest. Always account for insurance, taxes, maintenance, and vacancy. If I can't make at least 20% after that I won't buy. No I don't take on partners because they come with expectations. My money my success. If I screw up I pay for it, and if I don't I make good money. So far I have been very pleasantly surprised. I have not had one eviction or missed rent payment in 10 years. I score prospective tenants like an insurance company based off of rent history, credit, criminal, income, and evictions. Using this method I have never had to go to housing court. I give good service and I don't take any crap. I am going to community college this semester to get my real estate agent license. Once I get enough transactions under my belt I will get a broker's license so I can manage other investors properties. I cut my teeth on my own experience and have built a proven system. I know several local contractors that do good work for cheap, so I think I can be a real value add for local and out of state investors.
- Real Estate Broker · Portland, OR · Member since 2015 · 201 posts · 98 votes9y
I'm doing the BRRRR method in Indianapolis. I have all Duplexes in C and D areas. I shoot for 2%, some are way above and some a little below. I only buy value add properties that need work then Refi out at 70% of ARV. I'm also buying near downtown and trying to be in the way of progress. Deals are a little harder to come by then last year already.
Average Deal:
Purchse: 30k
Rehab: 30k
ARV: 100k
Refi: 70k
Rent: 1,400
- Rental Property Investor · Evans, GA · Member since 2014 · 74 posts · 65 votes9y
I've been able to take down a couple 2% deals as well as represented some clients who have done so in "C" areas of Augusta, GA. These are 3 bedrooms that will rent for $700-800 you want to be "all-in" with acquisition and repairs around $35k-40k or 4 bedrooms that will rent for $850.
It's pretty difficult to make these numbers now, but doable if you're patient. What's really cool is buying a one of these, fixing it up, rent it out, get it appraised for $80k, refinance at 75% LTV, pull out all your basis and a nice chunk of tax free cash, and still cash flow. It's good for the old balance sheet.
Here's an example of one:
2608 Blueberry Drive Augusta, GA 30906
Acquisition ~$15,300 (got it super cheap as an REO because it was infested with fleas and difficult to show)
Repairs ~ $20kish including roof, HVAC, water heater, refinish hardwoods, drywall/paint, new kitchen, and some misc.
Rented Section 8 for $700/month (about to increase to 745 :)
- Investor · Bristol, PA · Member since 2016 · 34 posts · 13 votes9yWalter Roby jr Diane G. Recently purchased a property in Bristol Pennsylvania. 3 bedroom SFH with a basement for 62k. 10k rehab for a total of 72k currently renting for 1500 a month which is just over the 2% rule. It's in a C area, and by no means is it a full time job managing yourself. If you do the rehab correctly, that should minimize the service calls. These deals are out there, just have to dig a little deeper.
- Investor · Janesville, WI · Member since 2013 · 180 posts · 155 votes9y
Originally posted by @Mike Dymski:
@Chris Heeren this is right up your alley
Okay, I'll bite.
My best is currently 7.9% with a $10,751 3bed/1bath Single Family House that rents out for $850. We bought this in August 2016. Keep in mind most properties here need some rehab and appliances and that should be accounted for in the initial price, this one was nearly move in ready will all appliances and even drapes except it needed a new garage roof. We ended up doing a couple other things to it because we could, ended up putting $7K into it.
I've also recently bought a 5 plex at 5.1% for $45,000 that rents out for $2,300. We will be able to get the rents up to $2,600 per month but will have to wait until the existing tenants move out and then rehab the units which will actually lower the purchase price to rent ratio.
I have several others in the 4%-5% range and they are all duplexes and triplexes. Which were originally old single family houses from the 1900s that have been converted over. These really are my bread and butter properties for the current market we are in.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
I have a few properties that are close but nothing that hits that level. The only way I can get that is if I go into neighborhoods that I prefer to avoid and rent to tenants that I prefer to avoid.
2% is not realistic in growth areas. In very high growth areas 1% is not even realistic. We have good growth here, solid but controlled, and I like to aim for 1.5% but that's getting very difficult to find; a few years ago it was easier.
Skyline Properties - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @Diane G.:
If the Tenant could buy the whole house with 3 years rent, why would he rent in the first place?why won't he just buy?
There are lots of reasons for this: no down payment; no job history; unstable employment situation (frequent transfers, for example); does not want to maintain/rehab a home; wants to live in a nicer area than buying would allow; ETC.
We have some older women who could afford to buy, but like being able to just call us if something goes wrong rather than hunt down their own repairman and pay the bill out of their pocket. Some people like that reasonable level of cost certainty.
Skyline Properties - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes9y
Originally posted by @Diane G.:
If the Tenant could buy the whole house with 3 years rent, why would he rent in the first place?why won't he just buy?
They don't qualify, no down payment money, they want or need mobility, not interested in looking for a house or getting a mortgage, don't know how to or don't care to learn, location, convenience, transitional point in life, don't want to or can't deal with maintenance, apartment renters like amenities...lots of reasons. We are a mobile renter nation.
Some of the members above did a nice job of posting pictures and describing what I was mentioning with C class earlier. There's variability in class definition by investor and by market and many of these properties are in very stable areas with long-term residents...they perform like B class residents with outpaced returns.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
@Walter Roby jr for me I can expect 0.8% in my market for high quality single family homes. Low quality homes in my area could get closer to 2% but that is not my business model. In my case the tenant pays all utilities and is responsible for all yard care. There is really very little expense on my end, so although some may say 0.8% is horrible, I will challenge them to consider how much effort they put into 2% properties. Often the 2% properties are run down or in bad areas, so people have vacancy issues and higher repair costs. Also keep in mind that income is only part of an investment. Appreciation over time is payout when you sell. In many cases the 2% properties have little appreciation. By comparison in LA, you can expect good appreciation, assuming you sell at the right time.
The point is that whether it is 2% or 1% or 0.8% that you use as a rule, it is just meant to be a guideline for evaluating investments. It varies by geography and type of property. Pick something that works for you.
- Real Estate Investor · Miami, FL · Member since 2013 · 474 posts · 214 votes9y
@Walter Roby jr Honestly it seemed pretty obvious. In this case it was basically where I would want to live. There were a ton of young professionals (and yes, hipsters, artists, etc) who were getting priced out of the adjacent trendy neighborhoods, And this one had a ton of foreclosures waiting to be fixed up. Maybe it's not that simple, but it seemed that way lol.
- Los Angeles, CA · Member since 2016 · 31 posts · 6 votes9y
@Greg H.:
>>I get that those of you in California cannot buy a parking spot for those numbers<<
Boy is that ever true. These prices are blowing my mind. I'm in Los Angeles. Wow!!
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes9y
The BP community talks a lot about the 1% rule, which is a little low in my market. I can get 2% RTV, but in most areas investors don't expect to get that.
This is not a hard and fast rule either. Rent to value is like a gross rent multiplier and does not reflect true cash on cash returns. Terms of the loan can change the entire equation.
Example: Will you pay me $1 million for my rental property? Probably not.
What if I financed it for zero interest for $1 per year for 1 million years? You would agree to those terms regardless of the RTV.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
Originally posted by @Anthony Dooley:
The BP community talks a lot about the 1% rule, which is a little low in my market. I can get 2% RTV, but in most areas investors don't expect to get that.
This is not a hard and fast rule either. Rent to value is like a gross rent multiplier and does not reflect true cash on cash returns. Terms of the loan can change the entire equation.
Example: Will you pay me $1 million for my rental property? Probably not.
What if I financed it for zero interest for $1 per year for 1 million years? You would agree to those terms regardless of the RTV.
Love your financing example and you are right, this rule completely ignores key factors. Here are some more:
- What is included in rent (are you paying utilities and yard care or is the tenant)
- Vacancy rate (Is the area desirable and tenant base stable or are you going to be re-renting every six months)
- Age and condition of property which affects capex (are all the mechanicals new or are you facing major expense like a roof or furnace)
- Expected appreciation (will you be able to sell it quick for a profit in 10 years or will you have trouble giving it away, which is a real problem in some areas)
- Financing terms (owner financing or bank, money down required, interest rate)
- General class of the property (in general C or D class tenants are way harder on a property and invite more problems than A or B class, which affects your operating expenses)
- Investor · Rockford, MI · Member since 2013 · 116 posts · 54 votes9yThe market I invest in in West Michigan. Duplex purchase July '14 $62,500 B to B- area Few minor fixes to both units (less than $3k) Rents for $1500 total the last 2 years. For those talking about poor markets, rural areas and D class properties, this particular one doesn't meet any of those criteria. The properties I've added since aren't 2% but are close. However, none of these came close to 2% at purchase, don't let that keep you from finding a good investment with potential.
- Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes9y
Couldn't agree more on C Class properties. I'm typically buying at 3+% "rule" which isn't all that difficult for this market. You can also lose a lot of money on 2% "deals" in my market, because of taxes and other expenses not common to other markets.
IRR is a great metric, but it's hard to use for long-term buy and hold because you have to project an exit time and amount with reasonable accuracy. The purchase and sale/refinance of the property are going to be the largest drivers of your IRR, so if you get your sell price wrong, you might as well not bother using IRR. If you're flipping or BRRRRing it works great (at least it better) and your projections will be validated/corrected very quickly. It can still work well if you're doing shorter term buy and holds (3-7 years) - but to project an exit price with any degree of certainty out past 10, 15, 20 or 30 years....I'm not buying it. Just natural appreciation/inflation are going to have a huge impact over 30 years, and could vary quite a bit between what we expect now, versus what we actually get in the future. That's when the other metrics (cash-on-cash, for one) are more valuable to me.
- Investor · Cleveland , OH · Member since 2016 · 17 posts · 9 votes9y
@Bill Pate you saved the day, lol. I started getting worried until I saw your post. I am in Cleveland as well (Eastlake/Mentor) and plan to start investing this summer. Maybe we can connect!
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes9y
Originally posted by @Jason V.:
Couldn't agree more on C Class properties. I'm typically buying at 3+% "rule" which isn't all that difficult for this market. You can also lose a lot of money on 2% "deals" in my market, because of taxes and other expenses not common to other markets.
IRR is a great metric, but it's hard to use for long-term buy and hold because you have to project an exit time and amount with reasonable accuracy. The purchase and sale/refinance of the property are going to be the largest drivers of your IRR, so if you get your sell price wrong, you might as well not bother using IRR. If you're flipping or BRRRRing it works great (at least it better) and your projections will be validated/corrected very quickly. It can still work well if you're doing shorter term buy and holds (3-7 years) - but to project an exit price with any degree of certainty out past 10, 15, 20 or 30 years....I'm not buying it. Just natural appreciation/inflation are going to have a huge impact over 30 years, and could vary quite a bit between what we expect now, versus what we actually get in the future. That's when the other metrics (cash-on-cash, for one) are more valuable to me.
Well said. All of my investments are value adds; so, I use metrics that factor in the forced appreciation (as you mention above) and also need some level of exit/appreciation factored in to benchmark stable versus appreciation plays. That second part can be more art than science but more science than ignoring the difference...it's directional.
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