Best cities to find 1% (or more) rule

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Best cities to find 1% (or more) rule

Blair Colsey
New to Real Estate · Broomfield, CO · Member since 2017 · 24 posts · 13 votes

Hi All,

I'm currently listening to @David Greene's book Long Distance Real Estate Investing on Audible (which is a great way to learn I might add) and I'm getting excited about buying some properties out of state. I currently live outside of Denver and I'm finding that although the increase in housing prices has been great for building equity on the properties I already own, its not so great for finding deals that meet the 1% rule requirement. I realize that the 1% rule isn't a "hard and fast" rule that needs to be met on all acquisitions but the point is, the market I'm in is not longer as hospitable to finding deals as it once was so I'm looking to expand into other markets. 

My question is this: What are the other markets where we're seeing the 1% rule being more attainable? Are there any resources anyone can recommend that help guide an investor through detailed market analysis?  I'd love to get to a point where I have 5-10 socioeconomic factors that I can easily calculate to identify market opportunities. 

Thanks in advance for your thoughts!!

Blair

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y
Originally posted by @Blair Colsey:

@Russell Brazil how so? We always talk about the 1% rule or even the elusive 2% as the benchmark in buy and hold investing. 

 Yield in any asset class is a measure of the markets view of the risk in the asset. The higher the yield, the higher the risk. With the higher the risk, comes the higher probability of actual returns deviating from pro forma returns.  This is a fundamental fact in any investment class...real estate, dividends, bonds etc.

The lower risk assets/markets (DC, Boston, Seattle) in real eatate actually typically have the higher return than the lower risk market (Baltimore, KC, Indianapolis).

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    7y

    There is no guide but all the cities you hear about over and over again may get you there. Baltimore KC Indy etc.

    2Reply
  • Derek Stewart
    Realtor · Denver, CO · Member since 2016 · 15 posts · 15 votes
    7y

    I am currently under contract for a duplex in Denver that will bring in $5200/month gross.  The one side has a mother in law suite, making it a 3 unit rental.  My monthly all-in expenses including vacancy rate, cap expenditures, monthly house repairs are just under $4,000. 

     This will net cash flow a conservative $1,200/month.  But it is only .84% of the 1% rule.  Don't get hung up on that metric alone.  I think that if you can find a property that is close to the 1% rule in Denver, the appreciation will make up for the rest.  

    There are still deals to be had in Denver.  

    8Reply
  • Johnny PineyroPro Member
    Golden Oak, FL · Member since 2018 · 78 posts · 25 votes
    7y

    Call Adam Adams in Denver they can probably help you find what you need.  He works with Scruggs out there and do great work.

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Id contend the higher the percentage it goes, the worse the market.

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  • Blair Colsey
    OP
    New to Real Estate · Broomfield, CO · Member since 2017 · 24 posts · 13 votes
    7y

    @Derek Stewart I'm taking about gross rents greater than or equal to 1% of the total purchase price. This would mean that your duplex would have to have a purchase price less than $520k. If you're talking about net income compared to purchase price, I believe that would be your cap rate. The reason you look at the gross rents compared to purchase price is because it takes your financing out of the equation. Anyone can make a property cash flow if you put enough down ;) 

    Either way, $1200/mo in net income sounds great! Good work!!

    2Reply
  • Blair Colsey
    OP
    New to Real Estate · Broomfield, CO · Member since 2017 · 24 posts · 13 votes
    7y

    @Russell Brazil how so? We always talk about the 1% rule or even the elusive 2% as the benchmark in buy and hold investing. 

    0Reply
  • Derek Stewart
    Realtor · Denver, CO · Member since 2016 · 15 posts · 15 votes
    7y

    @Blair Colsey, the purchase price is $620,000 and the gross monthly rents are $5,200.  5,200/620,000= .84%.  My cap rate is 7.79% and my cash on cash is 13.61%.  I use the bigger Pockets rental calculator to analyze my deals.

    I would have to buy it $520k in order for it to meet the 1% rule.

    2Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Blair Colsey:

    @Russell Brazil how so? We always talk about the 1% rule or even the elusive 2% as the benchmark in buy and hold investing. 

     Yield in any asset class is a measure of the markets view of the risk in the asset. The higher the yield, the higher the risk. With the higher the risk, comes the higher probability of actual returns deviating from pro forma returns.  This is a fundamental fact in any investment class...real estate, dividends, bonds etc.

    The lower risk assets/markets (DC, Boston, Seattle) in real eatate actually typically have the higher return than the lower risk market (Baltimore, KC, Indianapolis).

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    10Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @Blair Colsey My belief is you are going to find those deals in most of the country. If you simply rule out the obviously high cost areas, that is what is left. 

    The key is knowing the kind of properties to look for and getting the right deals. Most of the country you cannot get 1% if you simply go on the MLS and buy nice houses at retail.

    2Reply
  • Blair Colsey
    OP
    New to Real Estate · Broomfield, CO · Member since 2017 · 24 posts · 13 votes
    7y

    @Derek Stewart sounds like you found a good one! I'd definitely take .84% in this market and I agree that the appreciation should more than offset. Can I ask where you found it? MLS? Wholesaler? Your own research?

    @Russell Brazil sounds like you're talking risk vs reward. If higher risk means worse market than I agree but your reward should also be higher. There is inherent risk in all investments and our job as investors is to seek the highest returns while mitigating the risk as much as possible through due diligence. 

    0Reply
  • Derek Stewart
    Realtor · Denver, CO · Member since 2016 · 15 posts · 15 votes
    7y
    Thank you @ Blair Colsey. Yes this is a good one. Lots of numbers crunching and research. I found this on the MLS as an old expired listing from last year. I am a broker so I have access to all the expired listings. Unfortunately as a general consumer you don’t have this access. I have another one in my back pocket in case this deal falls through. And I found that one off market. I do a lot of cold calling and door knocking.
    1Reply
  • Randall Hoeber
    Yorkton, Saskatchewan · Member since 2016 · 53 posts · 26 votes
    7y

    I have a SFR in Warner Robins GA that is Zestimated to be $72500 which rents at $825. That is 1.14%. It is a very affordable market with great rents and you can easily get 1% or more if you buy right, but it is slow on the appreciation end. But definitely cash flows nicely.

    2Reply
  • Paul Aqua
    Property Manager · Sacramento, CA · Member since 2017 · 37 posts · 12 votes
    7y

    @Blair Colsey cap rate generally is higher with a greater amount of risk. Your A neighborhood might have a 3-6 cap and your D/F neighborhood might be at a 15% cap rate but the D class neighborhood is inherently more riskier

    0Reply
  • Megan Barron
    Rental Property Investor · Santa Rosa, CA · Member since 2018 · 11 posts · 6 votes
    7y

    @Blair Colsey

    I’ve been looking out of state also. Even houses that cash flow nice once I factor in the 16% monthly property management fee (after leasing fee) I barely make any money. You have to look really hard for deals right now they aren’t easy to find.

    0Reply
  • Keith Jourdan
    Property Manager · Metro Detroit, MI · Member since 2008 · 305 posts · 362 votes
    7y
    Here in Metro Detroit we are still able to be all in with rehab at 100k-110k and rent for $1200+
    6Reply
  • Account Closed
    Los Angeles, CA · Member since 2018 · 95 posts · 46 votes
    7y

    @Keith Jourdan

    ... but local property taxes and vacancies are the killer

    Also I would I would be cautious investing in rust belt cities with a potential recession around the corner

    2Reply
  • Bala A.
    Rental Property Investor · Memphis · Member since 2018 · 128 posts · 97 votes
    7y

    where and what you buy in Detroit and right property management will determine your success in this market

    1Reply
  • Jeff Schechter
    Developer · Nashville, TN · Member since 2016 · 484 posts · 406 votes
    7y

    I disagree with using assumed appreciation to make up for returns that you could get right now.

    By doing this, you're giving up real income, for the promise of MAYBE something later... something that can only be realized upon sale or refi.  

    There is a also a time value of money.  We certainly have plenty of inflation.  $100K is worth more RIGHT NOW in spending power, than what it will be worth in 10 years.   We will likely see MORE inflation coming up than less...especially with continued quantitative easing, and the rise of digital currencies.

    Overall, it's a bad idea to justify buy/hold returns with potential appreciation.  We are also nearing the end of the appreciation cycle in many markets.  There's no guarantee that things will continue to go up.  We're already seeing some cooling in some markets.

    Just my $0.02

    10Reply
  • Ozzy SirimsiBusiness Member
    Real Estate Agent · Baltimore, MD · Member since 2016 · 1k+ posts · 782 votes
    7y

     Baltimore!!!

    I would not even buy a house with %1.

    1Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Blair Colsey. Memphis, Cleveland, KC, Indy, Chicago (maybe), Milwaukee.

    Pretty much anywhere in the Midwest or southeast. I’ve bought 1 percent, 2 percent deals. I inherently prefer higher percentage. In general higher percentage means higher risk but I don’t think that’s always true either.

    4Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    7y
    Originally posted by @Blair Colsey:

    Hi All,

    I'm currently listening to @David Greene's book Long Distance Real Estate Investing on Audible (which is a great way to learn I might add) and I'm getting excited about buying some properties out of state. I currently live outside of Denver and I'm finding that although the increase in housing prices has been great for building equity on the properties I already own, its not so great for finding deals that meet the 1% rule requirement. I realize that the 1% rule isn't a "hard and fast" rule that needs to be met on all acquisitions but the point is, the market I'm in is not longer as hospitable to finding deals as it once was so I'm looking to expand into other markets. 

    My question is this: What are the other markets where we're seeing the 1% rule being more attainable? Are there any resources anyone can recommend that help guide an investor through detailed market analysis?  I'd love to get to a point where I have 5-10 socioeconomic factors that I can easily calculate to identify market opportunities. 

    Thanks in advance for your thoughts!!

    Blair

     100% Cleveland is a great one. Properties here are often around 1.5%

    0Reply
  • Filipe Pereira
    Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    Connecticut is still definitely above the 1% rule, even on the MLS. No fancy direct mailers required to get off market deals. Here are a few deals that I know of or was a part of, some more recent, other in the least year or two. All in Hartford County, CT or Springfield MA

    Most of the stuff on the mls is around 1.2/1.3 with the occasional 1.5 or 1.6%. 

    Fall 2016:

    3 Units, B Area in Windsor, PP of 235K, Rented at 3300. Now over $3500 Gross 

    4 Unit, B- / C+ in East Hartford, PP of 200K. Rented at 3600. 15K in Renovations. Now $4800 Gross

    Fall 2017 
    5 Unit, B- in East Hartford, PP of 320K. Rented at 4600. I expect to be able to get these up to $5,000 by year end.
    3 Unit, B- in Springfield, PP of 226K. 2 units undergoing rehab. Expect rent to be around $3,300 once complete. 

    Current under deposit: 

    6 Unit, B- East Hartford, Listed at 380 (can't disclose contract price). Current rents around 5K. Expect these to be around 5500-6000 once brought to market rate if memory serves me right.  

    5Reply
  • Chris J.
    Charlotte, NC · Member since 2016 · 1 post · 1 vote
    7y

    @Randall Hoeber

    What’s been your experience with vacancy in WR? Have evaluated a few deals there and wondering how that figure shapes up in a military area.

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    Originally posted by @Jeff Schechter:

    I disagree with using assumed appreciation to make up for returns that you could get right now.

    By doing this, you're giving up real income, for the promise of MAYBE something later... something that can only be realized upon sale or refi.  

    There is a also a time value of money.  We certainly have plenty of inflation.  $100K is worth more RIGHT NOW in spending power, than what it will be worth in 10 years.   We will likely see MORE inflation coming up than less...especially with continued quantitative easing, and the rise of digital currencies.

    Overall, it's a bad idea to justify buy/hold returns with potential appreciation.  We are also nearing the end of the appreciation cycle in many markets.  There's no guarantee that things will continue to go up.  We're already seeing some cooling in some markets.

    Just my $0.02

    I understand your view but will state that with market analysis you can more accurately forecast the potential appreciation.  I would not recommend blindly picking a market and hope for appreciation.  You are in a market with historical low appreciation.  Your view about not expecting appreciation is based on the experience of that market.

    However, what if your market had 60 consecutive years of long-term appreciation (every 5 year window for the last 60 years has appreciated), had a similar history of rent appreciation, vacancy rate below 4%, one of the worse housing shortages in the nation, virtually no land to build, a build cost that is ~$100K in permits/fees to start construction on a SFR? Would you feel comfortable forecasting appreciation under those conditions?

    I have seen that those that do not invest in high appreciation markets typically do not desire to include appreciation in their analysis.  Those that invest in high appreciation markets typically forecast conservative appreciation in their analysis.  

    Cash flow is also not certain. Just refer to markets like Detroit at the Great Recession for proof.

    It is like the case for COC versus IRR. The IRR advocates believe COC does not indicate the full picture. COC advocates typically point to IRR having too much speculation but I argue the COC also has a degree of speculation. I do a quick analysis with what is similar to COC (rent to cost ratio), but for my more in depth and accurate forecast, I use IRR.

    Good luck

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y

    @Blair Colsey

    The definition of best is a little vague.

    1. Easy to find: look for Midwest cities with declining populations.  Another good choice is cities that were heavily battered by the Great Recession (ex. Detroit).  Final good choice is look at the D/F areas of large cities.
    2. likely to produce great ROI: Look for growing cities with a variety of employment and constrained on land.
    3. easy to manage: look for either easy for you to get to or a city were you have friends/family that are willing to help.

    For me I would consider item #1 as not a great investment choice. 1% properties does not necessarily equate to producing a good long term ROI. The market prices risk and expected appreciation into the market price. 1% properties, therefore, are properties that are expected to have more risk and/or less appreciation than properties that are less than 1% properties.

    I would choose both #2 and #3 if I were entering a new market.

    Good luck

    2Reply
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