How conservative is too conservative?

Question

We've done some great deals but realize it may be stopping us from true growth. I love the 2% rule and achieve it well, but is that really the rule? 2% of cost for the rent fyi..... Currently looking at a $62k close with $5k work and $2200 prop taxes and 700 insurance. Pretty much $315 on 20yr at 4.5% plus taxes and insurance.  Rent of $800 to $1100 I'm thinking. Feeling good but doesn't meet my great deal protocol. What's your thoughts? What does everyone gage their deas with?

Account Closed · Answer

@Scott Perkins I base my investing on my perceived stability of the market I'm dealing in. In a state that is accumulating vast debt (Illinois) my guess is that eventually they will be raising tax rates and instituting taxes I haven't even heard of to meet the overspending and debt. So, if I was investing in Illinois (I'm not) I would want to pad my monthly rent to cover the expected increases.

Aaron Mazzrillo · Answer

Reusing toilet paper is being too conservative. Anything else is up to your tolerance for risk. The 2% rule isn't a rule. It is a measuring stick made up by people on BP who most likely buy complete junk in really crappy, non-appreciating markets where there are so few retail buyers the majority of houses are sold to out of state investors thinking they are getting a smoking deal because they only see .5 to 1% rent to value ratios in their own market.

I'd go as far to say I have conspiracy theories it was developed by a few turnkey providers lurking on here to push their product.

David Faulkner · Answer

It has been my experience that 2% deals are MORE risky than 1% deals ... that is why they are priced at 2%, to compensate the investor with potential cash flow for the extra risk they are taking on ... if they weren't as risky, then the market would likely drive the price on them up to 1% or less ... so the idea that you are being more conservative by investing in 2% rule properties instead of 1% rule properties seems fundamentally backwards to me. This is at ARV we are talking ... if you are buying 1% at ARV at such a discount that you hit 2%, then that is another matter entirely.