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 · 23 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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  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    I would want 2-3% ., wouldn’t waste time on 1% stuff but that’s just me

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    Originally posted by @Dennis M.:

    I would want 2-3% ., wouldn’t waste time on 1% stuff but that’s just me

    That is one approach. I take the IRR approach. I use the rent to value ratio as a quick check to see if more analysis is warranted. Then I use an IRR type analysis to determine my expected return. I sometimes run multiple scenarios. Sometimes there is a better scenario for the short-term and a different scenario is better in the long term.

    It takes a lot of cash flow via rent to equal one 6 digit value add or 7 digits of appreciation. My best ROI property had minimal cash flow at purchase. It was a duplex that we converted one unit to STR immediately and the other to STR when the market had STR expected return surpass LTR expected return. Today the rent to purchase has it as a 4% property due to rent appreciation and converting to STR. I suspect it was about a 0.6% on purchase. Of course the value of the property has appreciated significantly. We long ago extracted all of our purchase costs.

    If I limited myself to 1% properties then I would not have purchased the property. This property is a strong example of why IRR calculations should be performed in a RE analysis.

    1Reply
  • Randall Hoeber
    Yorkton, Saskatchewan · Member since 2016 · 53 posts · 26 votes
    7y

    @Chris J. so far so good.  The property manager had a tenant in there shortly after I took possession.  That tenant stayed over a year and then when she needed to leave abruptly the property manager had someone in within a week.

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    Cash flow vs appreciation debate...

    6Reply
  • Olu Oyelade
    Rental Property Investor · Oakville, CA · Member since 2018 · 23 posts · 7 votes
    7y

    @Dennis M. Which city are you investing currently ?

    0Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    7y

    @Blair Colsey I’m with @Derek Stewart in sticking to CO. We picked up an off market west wash park triplex last year, measly 0.75%, but rents went up 16% so we’ll be at 1% before too long, and appreciation in less than a year has been very substantial. I don’t even want to say the number on here so let’s just say we’d have to buy the whole city of Detroit and hold onto it for 20 lifetimes to get comparable appreciation, plus a few Cleveland’s and Indy’s too. It was our only transaction last year which set us back from our cash flow goals, so that’s the downside. It’s hard to find deals but being an out of state owner isn’t exactly a walk in the park either. After watching friends get burned trying to invest out of state, or just tying up their money and time, dealing with all the hassles and using vacation time to go to the Midwest for zero appreciation, I wouldn’t even consider it. Local market knowledge and connections are key in my book.

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

    @Steve K., yes rents continue to rise.  And with home prices still increasing and the cost of living continually going up, rentals will be highly sought after for a long time to come.  When looking for rentals, I look in areas with middle class people, close proximity to public transportation, schools/colleges, new commercial development, and also what does the city have planned for the area over the next 5, 10, 20 yrs.

    2Reply
  • Maurice Lucas Jr
    Lender · Detroit, MI · Member since 2017 · 15 posts · 4 votes
    7y

    @Blair Colsey would you be interested in the Detroit market?

    0Reply
  • Ian Barnes
    Rental Property Investor · Baltimore, MD · Member since 2014 · 247 posts · 321 votes
    7y

    Come on @Ozzy Sirimsi, Baltimore is not that bad.  All in for 80K-90K, expect $1200-1400 in rents for a voucher tenant, be picky with tenants, taxes 1000-1500 per year, some lower, some higher, C to D class neighborhood, more headaches. Baltimore County, all in for 110K, solid B-C class neighborhood, rents $1400-$1500, less headaches.

    0Reply
  • Ozzy SirimsiBusiness Member
    Real Estate Agent · Baltimore, MD · Member since 2016 · 1k+ posts · 782 votes
    7y

    @Ian Barnes I meant I look for

    higher return :))

    %1 is easy

    I would not a buy house that brings %1, always look

    for more

    0Reply
  • Kyle Schlosser
    Specialist · Louisville, KY · Member since 2017 · 166 posts · 154 votes
    7y

    @Dennis M. What property class and general location are you pulling in 2-3%? C/D in distressed Midwest?

    0Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Russell Brazil:

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

     Or better the marketing material lol

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y
    Originally posted by @Kyle Schlosser:

    @Dennis M. What property class and general location are you pulling in 2-3%? C/D in distressed Midwest?

     Yes 

    0Reply
  • Matt Greer
    Real Estate Agent · Mesa, AZ · Member since 2017 · 230 posts · 169 votes
    7y

    @Blair Colsey I’m in Fayetteville, NC and everything we deal with out here beats the 1% rule it’s a great town if you’re trying to get rental income. House prices are low so you can spread your money out over multiple houses which is nice in case something were to happen to one of them. There’s also new tenants daily since the largest military base Fort Bragg is here in town.

    2Reply
  • Martin Snow
    Rental Property Investor · Littleton, CO · Member since 2015 · 2 posts · 1 vote
    7y

    @Derek Stewart can you give us the numbers behind your deal. I’m also in the Denver market but invest in Memphis and would like to invest in Denver in the coming future. Thanks Derek.

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

    @Martin Snow yes here they are.  I do so with hesitation because I am sure there are a lot of differing opinions on my numbers and also what the numbers should be for ex. cap ex, vacancy rate, etc.  

    But I try and remind myself that cap ex. may be different than someone else's based on the newness of the building or recent repairs or replacement of roof, hot water heater, and so on.  And vacancy rate may be different based on location, etc.

    The current tenant who just signed a new 12 month lease is paying $2200/month plus utilities and water for a 4+ bed/2 bath with a fenced in front yard.  And then the unit I would live in has a 2/1 on the main and then a mother in law suite that has 3 beds/1 bath downstairs and a nice living room upstairs.  I will be spending money to soundproof the wall between the living room which backs to my kitchen.  I am conservatively going with $1,750 but they have alley access and their unit comes with a 2 car garage.  And the 2/1 is a nice size and like the other units has been updated in the past 3-5 yrs.  And when I move out I will asking $1250.  I use rentometer.com to guage rents.  I work for a real estate company and have access to staging and professional photography which helps to sell if the units are vacant.  

    --I am using seller credits to buy out my Mortgage Ins. And also potentially my loan rate if I negotiate right. So I already took out the MI but could get my rate down to 4.875-4.750%

    0Reply
  • Andrew K.
    Rental Property Investor · San Antonio, TX · Member since 2011 · 266 posts · 158 votes
    7y

      A single data point doesn't make a trend, however I wanted to provide an example in the market @Matt Greer pointed out; Fayetteville, NC. 

    These are ball-park figures for my 2 bed / 2 bath townhouse:

    Purchase: $30k and change (was a VA foreclosure)

    Rehab, fee, utilities, etc: $20k

    Rent: $800/mo

      I actually just raised the rent from $750 in DEC 2018.  My property manager (who is awesome!!) said this property received strong demand, largely because quality rentals (clean, energy efficient, and updated) are not readily available in this price range.  Much of the rentals at the $700-800 price point are dated, dirty, and poorly managed.  

    The phrase "needle in a haystack" comes to mind, but I bought this place off the MLS. 1% or better deals are out there, I recommend picking a market, building your team, and focus your efforts. The key is to get started.

      Best of luck in 2019!

    -Andrew

    2Reply
  • Paul Aguilar
    Realtor · Simi Valley, CA · Member since 2018 · 39 posts · 10 votes
    7y

    I know Nashville is a hot market. Any 1% returns out there?

    0Reply
  • Steve Frye
    Real Estate Agent · Nashville, TN · Member since 2018 · 123 posts · 74 votes
    7y

    Sure thing @Paul Aguilar.  More difficult right in metro Nashville but there are opportunities like that within 30-45 mins of Nashville.  Depending on budget, I know of some lower priced properties but also some mutis with 4-10 doors that would do that as well.  

    I'm a big fan of multis (especially up to 8 doors due to the leverage you can get with some of those properties and the ability to spread the vacancy risk out a little more).  

    1Reply
  • Martin Snow
    Rental Property Investor · Littleton, CO · Member since 2015 · 2 posts · 1 vote
    7y

    @Derek Stewart that's great. I have equity in my house and looking this summer to either sell it and buy a duplex, triplex, or fourplex or rent out my rooms again. However leaning towards selling because I don't like living with roommates and being a Vet I can take advantage of my VA loan for multi-family. Thanks for the numbers.

    1Reply
  • Derek Stewart
    Realtor · Denver, CO · Member since 2016 · 15 posts · 15 votes
    7y

    @Martin Snow thank you! From my perspective it seems like you are in a good position RE wise to be able to upgrade to a 2-4 unit property. But the sell vs hold decisions are always tough. I would say that it sounds like you may be able to finance a duplex or triplex if you take a HELOC out on your current property given the benefits of VA loan. But if your current property will just be a headache than shoot in the head and move on.

    After running a lot of numbers and looking at duplexes and triplexes.  It makes sense for a house hacker/someone that doesn't want to pay their mortgage while the live on the property... My suggestion would be to look for a triplex or quadplex.  I didnt find one duplex that would have paid my monthly all-in, with just one side paying...Based on the type of property I am looking for.  After a year and I move out, then they would cash flow.

    ****Im referencing the Denver market...Just an FYI for anyone on this thread that is not in the CO RE investing space.

    0Reply
  • Matt Greer
    Real Estate Agent · Mesa, AZ · Member since 2017 · 230 posts · 169 votes
    7y

    @Andrew K. makes a good point. In the Fayetteville, NC market the demand for clean rentals is very high. The market is full of sub par rentals so if you have a decent house here it'll be in high demand. Luckily not a lot of people buy here but a lot of people rent so it creates an ideal market for buy & hold

    0Reply
  • Jay Coombs
    Military · Oak Harbor, WA · Member since 2017 · 8 posts · 0 votes
    7y

    @Andrew K. Would you mind PMing me the name of your property manager in Fayetteville? I'm looking to buy out there and would love a jump start on a quality PM!

    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    7y

    Try these: Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets.

    1Reply
  • Account Closed
    Rental Property Investor · Arlington, VA · Member since 2019 · 8 posts · 2 votes
    7y

    @Ozzy Sirimsi  could you be more specific, like what areas of Baltimore do you recommend looking at? (I'm in DC ...) 

    0Reply
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