Care to share investment criteria in pricey RE areas?

Question

Right now I am looking for property to buy in the Boston area. When looking for properties I tend to try to find ones that meet the 1% and 50% percent rules however, its very difficult to find properties like this.

I have analyzed a few properties that dont quite meet the one percent rule but seem to cash flow. However, I am a bit hesitant about going for properties that don't meet the one percent rule because I've heard many investors say that you are doomed for failure if you don't meet that rule.

I was wondering if anyone that lives in some of the more expensive areas like Boston or California cities would be willing to share how they go about looking for properties. What rent to price ratios are acceptable for you?

Does anyone settle for .8%? Less? If so, whats your logic behind your criteria? Thanks!

Michael Haas · Answer

@Bryan Doan all of our rentals are single family, and .7-.8 % is very doable in Seattle. Most of mine have been 1% properties but all have been rehab's/value adds, which I know not everyone wants to undertake.

As for Criteria - I can't speak to all markets, but the key around here is maximizing bedroom count and taking advantage of Seattle's ADU friendly regulations to buy single family properties that are "Duplex-like" without having to pay Multifamily prices.

An additional bedroom past 4 in a single family home only adds about $10,000 on average to the purchase price, but it increases yearly rents by $9,600. If we isolate each additional bedroom past 4 and look at the bedroom ROI in a vacuum that's a 96% return, or 2,000 % Cash on Cash (house hacking with 5% down) for each additional bedroom past 4 you can find / create in a single family home.

Lien Vuong · Answer

Boston is closer to .75% and to @Mark Mahoney's point it's ROI. You have to evaluate this by the areas you're looking in. Boston metro will be one of the most insulated market in the country so you have to consider that. Because I bought 'right' and in market I know well, my 60 units are 100% paid up in April's rent cycle. You have to look at the macro picture. Appreciation in Boston is RIDICULOUS and the tenant class you have for these areas are going to be much stronger than other markets.

Cash/cash, appreciation, and value add are great factors to analyzing deals in A markets.

If you're specific on the 1% rule you can also explore suburbs of Boston 30-40 miles outside that would still be a good area with more attractive entry prices. Those definitely exist, just probably not at purchase. I can think of two properties in the last two weeks that past 1% rule at purchase that was on the market.

Joseph Cacciapaglia · Answer

Investors buy at 0.8% all the time. Sure there are many investors that focus on day one cash flow over everything else, but there are plenty of others that focus on total returns. However, if you are buying at 0.8%, you have to understand where your returns are coming from. Either you're adding value in some way, or you're buying in an area with strong rent growth and appreciation, or both. In either case, most of your return is going to come from appreciation and/or cash flow that comes later in the hold period.

Mark Mahoney · Answer

@Ethan McRae I have analyzed hundreds of deals in the Boston market and have never looked at the one percent rule. I would focus on ROI instead when looking at the Boston market. What type of property are you looking for? What exact area? I am local to the Boston market so I may be able to be of assistance.

Zac Ballin · Answer

I do look for the 1% rule in my properties.  I've hit it, exceeded it, and come close.  It's possible to achieve it just takes a lot of digging.  Happy to discuss further if you'd like.

Lien Vuong · Answer

Cash on cash for Boston based properties are 6-8% with cap rates around 4/5% and secondary markets are 8-12% and cap rates of 6/7%.

Nick Jasinski · Answer

Ethan - great post, I am wondering the same thing. To those who have found 1% properties in the Boston area, how expensive were you looking at? It seems even in the Dorchester area it must have been north of $600k? I have been looking further out of the city for these reasons. Still trying to scope it all out for my first purchase. Would love to connect with anyone in the area!

Bryan Doan · Answer

In the Seattle areas, I don't know if any SFH landlords can get any more than .5%.  A 500K SFH can only be rented for around 2.5K a month.  Probably, SFH landlords here in Seattle areas are more for over the years appreciations?

Ethan McRae · Answer

@Lien Vuong Thanks for the feedback, this is great to hear. Would you care to share what cash on cash you like to look for when analyzing properties?

Zac Ballin · Answer

@Ethan McRae Dorchester so far.

Care to share investment criteria in pricey RE areas?

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