Use the 1% or 2% rule?

Question

Hi, this is for anyone that invest in Houston, TX or surrounding areas. I'm taking the steps to analyze deals in the search for my very first one. As a rule of thumb, do you use a 1% or 2% rule for narrowing deals down to really dig into? Any help is greatly appreciated!

Jacob Pereira · Answer

@Cory Clay, neither. In Houston you won't find a legitimate 2%, and you'll only find 1% in the roughest part of town. Rather than use an arbitrary rule some guru came up with, try to find properties where you can do more of a value add than other investors. Easier said than done, I know, but if you want easy Investments buy S&P index funds.

Pete Storseth · Answer

@Cory Clay

Dont give up. Deals aren't just sitting on the MLS all the time. They drop outta nowhere and get snatched up day one.

People will tell you you wont find it. Ask yourself, how can I find it?

Many of my first posts were asking how do i find my first deal when I dont have any money? The first replies on BP were, get a better job, in so many words.

Then, after continuing research and posting better questions, others reached out, I got more positive replies. I can get grants for down payment assistance, portfolio loans, hard money, private money loans, etc.

Just keep working at it. Yes, 'gurus" and YouTube videos teach you the basics, but we have to get our feet on the pavement to really understand them.

Ryan Johnson · Answer

It’s tough out there. 2% isn’t reasonable in this market. I’m happy finding 1.2 right now.

Pete Storseth · Answer

@Tommy Daggett

Just remember guys, 1% is just a guideline. Work the numbers, when it makes sense, relentlessly pursue the deal.

I have yet to find 1% deals. I haven't even seen a significant profit margin on a potential rental yet. But I'm still learning.

Getting my money ready is my focus. Along with lining up cash buyers, private investors.

Ask everyone you meet that buys real estate what they're looking for, then seek it out for THEM. Then, you know when. You find a deal, you have a buyer or lender. Simple.

Pete Storseth · Answer

@Tommy Daggett

Its different for every lender. Whether private or hard money, or smaller banks, they all have different standards.

It makes sense reallly. My issue is DTI, so I'm saving and paying off smaller debts to decrease the amount I owe (student loan, rooms to go, etc.) and consolidating the rest into lower interest accounts.  The idea is to manage your credit accounts at a zero balance. Best to use one for your autopay expenses, and auto pay that account from your bank. It's easy once you're there, literally all you have to do is know what you can cover.

The better the deal, the more likely the lender will loan, yes. Of course, right? It makes sense too. If it was you, what securities would you want on your money? Would you want a junker that either will get turned into something nice and creat a profit, or would you rather have a decent property that was simply bought at a discount? Always think of the worst case scenario.  If you fail or bail, what would the lender have left? If they have something they can sell that will give their money back, fine. If they could sell and make a profit even if you failed, they'll definitely do the deal.

Tommy Daggett · Answer

@Pete Storseth I had the same questions you had with financing your first deal with low money down. And have been getting the same answer you got--- grants for down payment assistance, portfolio loans, hard money, private money loans, etc.

Also, I have heard many times that the better deal you find, the easier financing becomes. What have you heard on this?

I am currently trying to figure how to build relationships with private investors.

As even with hardmoney they require some skin the game. Didn't know about grant assistance for down payments.

Do you know if portfolio loans require a significant portion of "skin" based on your deal's numbers?

Tommy Daggett · Answer

@Cory Clay Hello sir,

While I do not posses any experience (as i am still in the learning phase of my journey), what I have thus far learned is the %1 or 2% rule and how you use it depends on your goals. I had this same question myself, but quickly answered when I clearly defined my long-term goal and through a lot of research. Hope this helps.

Good luck on your R.E. journey!

Cody L. · Answer

I wouldn’t say you only find 1% in the worst areas. I just bought a super nice, heavily renovated historic building downtown. $8m price. 90k of rent roll. So better than 1%

Just bought some high end new construction montrose properties that I’ll likely get $3800 in rent and I paid about $400k (not quite 1% but a+++ area and brand new. Though this was a not an easy deal to put together)

Bought a montrose 10 unit for $85k/door. Rents for 900-950I could give several other examples outside of A areas but still in B+ areas. Some galleria patio homes for $245k that rent for about 2400. Etc etc.if I do go to C areas I’m at 1.5% all day. Paid $6m for a 120k rent roll.  $3.4m for a $60k rent roll. Etc

please don’t give bad advice

Cody L. · Answer

Use the 100% rule: make money on every deal. 100% of the time.

Cory Clay · Answer

@Pete Storseth you’re exactly right. Never know what’s a good/bad question until you ask or get experience! Thanks for your insight

Use the 1% or 2% rule?

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