$400k, 1 to 4 unit property with 1% rule. Anywhere?

78 Replies

@Phil Mcnally It is really hard to find anything near a 1% rule in Austin, especially with the higher property taxes here.  I would suggest Indianapolis, Kansas City, Atlanta, Memphis, NE Ohio or other Midwest areas to get what you are looking for.

If you are set at finding something here in Austin feel free to reach out and I can tell you more about the area.

@Phil Mcnally you will not find a property on mls in sacramento to meets the 1% rule. It will have to be a great off market deal. You should look into Kansas City while you look into the St. Louis market. You can easily meet the 1% rule plus some. 

@Phil Mcnally

" It is the 1% rule with a $400k - $500k property that is the challenge. "

Brisbane is northern California, bay area. It is more than a challenge. It's near damn impossible. You will not find 1% in a house, which makes it a pure appreciation play. If it's multi units, it's still negative cash flow, but not as bad, which still makes it an appreciation play.

You have two choices, either wait on the sidelines until prices come down by a lot for 1% to be effective or go out of state.

People gave you cities where 1% in play, St. Louis

Indianapolis, Kansas City, Atlanta, Memphis, NE Ohio or other Midwest areas to get what you are looking for.

I gave you Las Vegas, and a lot closer to above cities mentioned, with not state tax.

Not sure why you are trying to fit a square peg in a round hole.

Terry

No square peg intended. I am not looking in CA.

I think it is reasonable to maximise the available loan if the properties exist.  If my available loan allows for a $500k property it would be great to find one (anywhere) that still follows the 1% rule.

The suggested cities are the best chance of finding it. And the thread has been helpful getting that list of possibilities.

 In general there are expensive places where $500k properties are easy to find but rents will not cover the cost. Or there are cheaper areas where $200k - $300k 4PLX properties will do 1% nicely.  But hard to find the $500k 1% property.

I will update the thread when I find some. Or anyone else feel free to post links to properties that they think are close - for discussion purposes.

phil

@Phil Mcnally

Your issue is $500k property with 1% rule. Problem solved. why don't you buy two 4plexs @ $250k each, with 1% rule. The conventional fannie mae, Freddie mac qualify guidelines with be the same either one 500k, or two 250k.

only issue is have 8 units to manage rather than 4. if you were planning to use property manager, then same either way.

Terry 

Phil,

Before you get roasted investing OOS using the 1% rule, please allow me to throw in my 2 cents:

Say $700/mo/unit for a 4plex asking $280k. 

Property management: $70/mo/unit or 10% of gross rent (don't know if they charge you half or full of first month rent)

Utility expenses: say average $100/mo/unit (Based on my experience)

Repairs & maintenance: say $70/mo/unit

Cap-ex: say $70/mo/unit

Vacancy: let's be optimistic and say 5% or $35/mo/unit

Insurance: say $35/mo/unit

Property taxes: say 1.2% or %70/mo/unit

Your monthly expenses are about 65%. In terms of cap rate, it's a 4.2 cap. What's the interest rate you think you can obtain of this asset OOS? If you borrow anything higher than 4.2%, you're negatively leveraging.

Say in my San Jose market, the average rent is $1,700/mo/unit for a 1-bedroom.

Property management: $85/mo/unit or 5% FLAT of monthly gross rent

Utility expenses: say average $100/mo/unit

Repairs and maintenance: say $85/mo/unit

Cap-ex: say $85/mo/unit

Vacancy: 5%, but the actual number is closer to 2%

Insurance: $35/mo/unit (actual number is closer to $25/mo/unit)

Property tax: say 1.2% for comparison purposes. It's a tad more.

My monthly expenses are about 38%. That's a 7.4 cap. We can borrow at 3.25-3.75% from our lenders here. So the spread is about 400 basis points. Even with 0.8% rule, our assets here still yield better than the 1% rule on those cheaper assets OOS. 

1% rule assets are reserved for folks in the inner circle and established closers. They don't make it to the market. ;)

Just want to share my 2 cents and best of luck with your real estate endeavors. 

Kansas City keeps popping up in this thread as a good possible investment city. Im hoping I can link to an article that was published today in the KC Star regarding rental rates in downtown Kansas City and the lack of affordable housing. http://www.kansascity.com/news/local/article174909001.html

Originally posted by @Terry Lao :

@Minh Le

@Phil Mcnally

Minh

What is the hypothetical sales price for this 1 bedroom condo? or if 4plex, for simplicity, just times by 4?

Terry

Terry,

We're talking about the 1% rule right? So $170k/unit renting for $1,700/mo, or $70k/unit renting for $700/mo. My point is that not all things created equal. 38% expenses compared to 65% expenses. The 1% rule is nothing more than garbage in garbage out. Don't get hang up on it. Run the actual analysis.

After one has run a few thousand of these analyses ranging from $500/mo to $2,500/mo in rent, one would not be fooled by the numbers provided by sellers or their agents. 

As I illustrated above, a 0.8% rule in more expensive markets will do better than the 1% rule in the lower markets, and we haven't even talked about the rent growth between the more expensive and cheaper markets. Thus, BP folks talk about the 2% rule. Buy $25-$30k houses renting for $500-$600/mo. Again, not all things created equal.

Now, folks want to buy 1% rule in one of the most desired real estate markets in the world such as the Bay Area or Los Angeles. Let me respectfully ask you this question. Why would agents/brokers bring these 1% deals to you? Give me one good reason when there's a long line of investors who are willing to pay 0.5%? If you can answer that question, welcome to the club. I'm speaking from a POV of someone who has been a beneficiary of getting these 0.8-1%+ deals in the San Jose market in the recent years including this year. 

I don't remember who said this "We have the answer. We just need to get quiet enough to hear it." I feel I'm most productive when I'm sitting around doing nothing but just thinking. 

If you think it's impossible, you're right. If you think it's possible, you're also right. The answer is up to you. 

Cheers!

@Account Closed

You did not answer the question, how much for 1 bedroom or 4plex. Let me answer your question, since I have a sister with house in Cupertino, and San Jose. Homes go for over a million. Fourplex will cost you over $1M, maybe $1.25M. Maybe you can get $2k month for 2 bed 2 bath. that would be 8k month. Even if you put down 25%, you would still cash flow negative. 

If you put $1.25M into Las Vegas, you could realistically buy five 4plexs, which is 20 units, which can get $700 a month, $14k gross per month.  A difference of 6k per month. 

Your Bay area will not cash better than Las Vegas for the money. The only difference will be appreciation, which may or may not be in your favor. 

Terry

Originally posted by @Terry Lao :

@Minh Le

You did not answer the question, how much for 1 bedroom or 4plex. Let me answer your question, since I have a sister with house in Cupertino, and San Jose. Homes go for over a million. Fourplex will cost you over $1M, maybe $1.25M. Maybe you can get $2k month for 2 bed 2 bath. that would be 8k month. Even if you put down 25%, you would still cash flow negative. 

If you put $1.25M into Las Vegas, you could realistically buy five 4plexs, which is 20 units, which can get $700 a month, $14k gross per month.  A difference of 6k per month. 

Your Bay area will not cash better than Las Vegas for the money. The only difference will be appreciation, which may or may not be in your favor. 

Terry

Terry,

I did answer your question. You just didn't get quiet enough to hear it. I bought two 7-unit for $1.1M and $1.125M with gross rent of $10,800/mo and $10,600/mo respectively, an 8 units for $1.2M with $12,400/mo, and six 2-bed units for less than $1.2M where I'm averaging $2k/mo/unit and 3 out of 6 units are still $500 each below fair market rent. I don't do 4plexes as I don't like the Fannie/Freddie underwriting guidelines. 

One of the BP contributors rents 3 units from for his corporate rental biz so he knows exactly where these building are located and what kind of rents I'm getting. Several other local BP members also saw my buildings in person. The normal response is "Minh, you stole that building. Minh, you stole that building too." LOL!

It's none of my business that your sister cannot find these deals. Why should I compare myself to your sister? Didn't I mention that these deals don't make it to the market? Let me ask you again. Why would agents/brokers bring these deals to you or your sister instead of me? ;)

With respect to that $1.25M deal in Vegas for $14k/mo gross rent, it's a 4.7 cap per my calculations. Why would I bother owning assets in the dessert when I can own premium assets in the Bay Area with a higher cap rate and better yield? 

@Account Closed

This post started with person wanting $500k purchase with 1% rule. Then you are talking about $1.2M properties. Heck, If I had unlimited funds, I would just buy 100 unit property in most exclusive area like beverly hills, or west los angeles. In long run, better area is always better, but if you don't have the money, you have to start somewhere.

Why not even go $1B commercial property building? 

Terry

Originally posted by @Terry Lao :

@Minh Le @Phil Mcnally

This post started with person wanting $500k purchase with 1% rule. Then you are talking about $1.2M properties. Heck, If I had unlimited funds, I would just buy 100 unit property in most exclusive area like beverly hills, or west los angeles. In long run, better area is always better, but if you don't have the money, you have to start somewhere.

Why not even go $1B commercial property building? 

Terry

I see someone is a peeved. You're the one that brought up $1.25M purchase for 20 units in Vegas first. That just happened to be my sweet spot so I shared some real numbers that's happening in the Bay. 

The point I tried to drive home is the flaw in looking at the 1% rule and pay $70k/unit for a $700/mo rent compared to $170k/unit for $1,700/mo rent. Same 1% rule with different expenses and cap rates. 

You're the one that brought up how your sister can't find a 4plex for less than $1M or $1.25M or whatever. How is that my problem, and you still didn't answer my question while I answered yours. 

I hope Phil got something out of my posts. I'm saddened that I wasted my time responded to your post thinking it was a genuine question. I won't do that again in the future. 

Best of luck with your real estate endeavors. 

Originally posted by @Terry Lao :

@Phil Mcnally

Your issue is $500k property with 1% rule. Problem solved. why don't you buy two 4plexs @ $250k each, with 1% rule. The conventional fannie mae, Freddie mac qualify guidelines with be the same either one 500k, or two 250k.

only issue is have 8 units to manage rather than 4. if you were planning to use property manager, then same either way.

Terry 

 Except that would be two loans.

Originally posted by @Account Closed :

Phil,

Before you get roasted investing OOS using the 1% rule, please allow me to throw in my 2 cents:

Say $700/mo/unit for a 4plex asking $280k. 

Property management: $70/mo/unit or 10% of gross rent (don't know if they charge you half or full of first month rent)

Utility expenses: say average $100/mo/unit (Based on my experience)

Repairs & maintenance: say $70/mo/unit

Cap-ex: say $70/mo/unit

Vacancy: let's be optimistic and say 5% or $35/mo/unit

Insurance: say $35/mo/unit

Property taxes: say 1.2% or %70/mo/unit

Your monthly expenses are about 65%. In terms of cap rate, it's a 4.2 cap. What's the interest rate you think you can obtain of this asset OOS? If you borrow anything higher than 4.2%, you're negatively leveraging.

Say in my San Jose market, the average rent is $1,700/mo/unit for a 1-bedroom.

Property management: $85/mo/unit or 5% FLAT of monthly gross rent

Utility expenses: say average $100/mo/unit

Repairs and maintenance: say $85/mo/unit

Cap-ex: say $85/mo/unit

Vacancy: 5%, but the actual number is closer to 2%

Insurance: $35/mo/unit (actual number is closer to $25/mo/unit)

Property tax: say 1.2% for comparison purposes. It's a tad more.

My monthly expenses are about 38%. That's a 7.4 cap. We can borrow at 3.25-3.75% from our lenders here. So the spread is about 400 basis points. Even with 0.8% rule, our assets here still yield better than the 1% rule on those cheaper assets OOS. 

1% rule assets are reserved for folks in the inner circle and established closers. They don't make it to the market. ;)

Just want to share my 2 cents and best of luck with your real estate endeavors. 

I don't mind getting roasted if I learn something :-)

My current 12 month expenses are about 56% but I have seen them as high as 65% over the years. I have owned some rentals since 2008 and your numbers are about right. As a 'passive' investor I have choices like stocks, bonds, gold or rentals. From the start I have been unsure if you can really make decent returns on real estate if you are not 'inside' the biz hustling for deals. I decided to buy some and find out. 

Even though I am not buying hidden treasures and BRRRRing my way to accelerated appreciation etc They have still worked out over time. Between the rental income, Principal paid, moderate appreciation and tax reductions against my W2 income they do far better than good old stocks and bonds. If I can buy a little better than before and max out my conventional loans then I think that will work out in time as well.

Along those lines it would be hard for me to find San Jose properties that match your numbers as I am not a full time, real estate guy, with good connections (through hard work). Even 0.8% rule would be very hard for me to find as a part timer don't you think?

I am happy to look at any links of course.

phil

Just now finishing renovations on one in Kansas City and will be leasing in a few weeks. Bought as a buy and hold, just did major renovation, gross rents $3,475. I'd probably be willing to sell it for the 1% rule assuming no agent fees.

Originally posted by @Account Closed :
 Didn't I mention that these deals don't make it to the market? Let me ask you again. Why would agents/brokers bring these deals to you 

I think this is important because you are highly skilled and have invested a lot of time developing a network/business that can develop these deals. But many people like myself will never do that for various reasons. So we look for more boring and steady returns from accessible markets. I can not compare my opportunities to yours I think.

@Phil Mcnally

yes, two loans. however,  if you qualify for $500k, then 2 (250k) you should still qualify. it might cost you $3k more to do two. maybe cut fees down if you work out deal with lender. 

however, what is your other option? ..........back to square one. why can't i find 400-500k with rents 1% of sales price.

terry

Originally posted by @Jamie Rose :

Anchorage, Alaska you can find 4plexes for 400k and 1,000 or greater rent fairly regularly.

 Oh really. See there is a new place to look that doesn't come up often.

Originally posted by @Lee Ripma :

Just now finishing renovations on one in Kansas City and will be leasing in a few weeks. Bought as a buy and hold, just did major renovation, gross rents $3,475. I'd probably be willing to sell it for the 1% rule assuming no agent fees.

 $347k is not quite the $500k 1% but getting close. I am interested to look. The original $400k became $500k when I understood the loan limits better.

Originally posted by @Terry Lao :

@Phil Mcnally

yes, two loans. however,  if you qualify for $500k, then 2 (250k) you should still qualify. it might cost you $3k more to do two. maybe cut fees down if you work out deal with lender. 

however, what is your other option? ..........back to square one. why can't i find 400-500k with rents 1% of sales price.

terry

 True but that was kind of the challenge. Do they exist? 

The search started from the point of view that I have ten, 30y, fixed,conventional loans available for 1-4 unit properties. If I could find ten $500k properties that 'work' I could borrow a max of $5mill x 75ish %. This would maximise gains over time compared to ten $250k properties. But only if they exist. If they don't then better to find the next highest properties that do.

I am still hopeful they can be found. We seem to be getting closer as people chip in ideas. High $300's are doable. I have not yet seen a $400+ 1% property that an average Joe investor could buy without having some kind of off market find or rehab plan to boost value.

It is fun trying though right?