Thoughts About The 1%-2% ?

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Thoughts About The 1%-2% ?

Justin Sheppard
Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes

Hey everyone,

I'm slowly but surely digesting lots of the videos and podcasts provided by the BP team. One thing I have found interesting is the 1%-2% "rule", which I will acknowledge the BP team has made clear is not necessarily something that should be blindly followed. However, for curiosity, I've been applying it to houses in my home city of Regina, Saskatchewan (Canada), as well as to some farmland properties.

My first question is: is anyone aware of any markets where there are good investment opportunities that are meeting the 1% to 2% rule?

I've put together a few examples below. I'm curious to see if people feel like the rent to price ratio in my market is too high? Or would some of you still consider these good investments?

SCENARIO 1:

2017 built 1,700 sq ft two storey home in a nice neighborhood. Close to schools, shopping, etc. Four beds, 3.5 baths, nicely landscaped.

Price: $450,000.00 CAD

Gross Monthly Rent: $2,200.00 to $2,700.00

Percentage Range: 0.488% to 0.6%

THOUGHTS: This isn't even coming close to 1%. However, the neighborhood and rental price range should theoretically attract good tenants. Also, the cap-ex should be lower overall as it is a new and quality build. This scenario produces negative cash flow of around $100 per month out of my pocket.

SCENARIO 2: 

160 acres of grain producing farmland in Saskatchewan. Good location in a good farming community, within 1 hour drive of the capital city of Regina, SK.

Price: $175,000.00 CAD

Gross Annual & Monthly Rent:$55 per acre X 150 cultivated acres =  $8,250.00 per year, $688.00 per month.

Percentage: 0.4%

THOUGHTS: Again, this isn't coming close to the 1%. However, farmland is nice because the asset doesn't depreciate (as long as you have a good tenant who properly farms the land, and you have not purchased any buildings on the land). Also, management is very hands off, as tenant pays half in the Spring and half in the Fall. This scenario produces a small amount of negative cashflow, around $10 per month out of my pocket.

I'm curious to hear your thoughts on these scenarios, and whether or not you apply the 1% or 2% rule when you are picking properties to invest in? What other things do you consider when picking a property?

Thanks all, and I hope you've all enjoyed your weekend!

Justin

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Nate Sanow
I​nvestor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes
5y

@Douglas Spence

Yessir more often than not, yes. Now, everything is compressed here as much as anywhere else with limited inventory.

So as they say sometimes the deal isn’t found, it’s made.

If you want to connect, I’ll point you to others with opportunities or talk to you about some I come across.

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  • Ryan XuPro Member
    Real Estate Broker · Bellevue, WA · Member since 2020 · 95 posts · 65 votes
    5y

    It'll depend. There is no golden rule for 1%. A higher population density metro will more likely to have a lower rent/price rate due to the higher potential of appreciation and higher liquidity (easier to sell).

    In your case, both sound good. I'll definitely choose the 1st property to invest in. Although as you said, 2 may have less chance to depreciate for land, and it cost you less on initial investment or on cash flow. The reason I am choosing 1 is considering it's easier to find a tenant for a house than farmland. Especially if that's a decent neighborhood, you'll have more potential to get better appreciation.

    Saskatchewan is nice, I almost moved there 9 years ago.

    [email protected]
    0Reply
  • Mark H. Porter
    Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
    5y

    Neither would attract me. I have never even used the 1% rule in my 23 years of playing this game. I can't tell if your goal is wealth through appreciation or wealth through cash flow. In my case, I buy properties that need work as it scares others. I buy at a great price, concentrate on repairs that are first, regulatory (fire, electrical code), second, raise the rents to market max, and lastly, just makes it prettier (landscaping, fencing, paving). I get very high appreciation as NOI increases so I could either sell or simply soak up the high cash flow.

    2Reply
  • Justin Sheppard
    OP
    Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes
    5y
    Thanks for the feedback, Ryan! Saskatchewan is indeed a great place. I'm leaning towards doing both of these investments, and glad to hear some feedback that they are both decent when considering they fail the 1% "rule". The area I am looking to purchase the farmland in has several high end tenant prospects, so I don't expect that I'd ever have a difficult time finding a renter. But I do agree, a newer neighborhood with a house close to a school should theoretically be very easy to find a tenant.

    Hope all is well in Washington!

    Originally posted by @Ryan Xu:

    It'll depend. There is no golden rule for 1%. A higher population density metro will more likely to have a lower rent/price rate due to the higher potential of appreciation and higher liquidity (easier to sell).

    In your case, both sound good. I'll definitely choose the 1st property to invest in. Although as you said, 2 may have less chance to depreciate for land, and it cost you less on initial investment or on cash flow. The reason I am choosing 1 is considering it's easier to find a tenant for a house than farmland. Especially if that's a decent neighborhood, you'll have more potential to get better appreciation.

    Saskatchewan is nice, I almost moved there 9 years ago.

    1Reply
  • Justin Sheppard
    OP
    Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes
    5y
    Thanks for the response, Mark! I'd love to approach investing the way you are describing here, but my main downfall is that I really don't have any handy-man skills (really regretting not taking woodworking and construction in high school, lol). Thus why I'm leaning towards a newer build or farmland. 

    My goal is a blend of both, although it seems like the property appreciation is the more likely option for me, seeing that my analysis is showing that positive cash flow is not going to be attainable (initially), but that should change as rental prices trend upwards.

    Do you do a lot of the repairs yourself, or do you hire out the work?

    Hope all is well!

    Originally posted by @Mark H. Porter:

    Neither would attract me. I have never even used the 1% rule in my 23 years of playing this game. I can't tell if your goal is wealth through appreciation or wealth through cash flow. In my case, I buy properties that need work as it scares others. I buy at a great price, concentrate on repairs that are first, regulatory (fire, electrical code), second, raise the rents to market max, and lastly, just makes it prettier (landscaping, fencing, paving). I get very high appreciation as NOI increases so I could either sell or simply soak up the high cash flow.

    0Reply
  • Zorya Belanger
    Rental Property Investor · Edmonton, Alberta · Member since 2015 · 307 posts · 200 votes
    5y

    Hi @Justin Sheppard 

    I’m from Edmonton and our market is similar in that that’s probably what I could expect for a single family home too. I would not buy a negative cashflowing property and keep looking. They need to cashflow.  We just bought 3 brand new suited townhouses for $440k each, and $2800/month rent for each. Due to commercial financing and 1.45% interest, they’ll be cashflowing about $500/month.

    I’m sure there are better opportunities than that in Regina. Might be similar to Edmonton, in that single family doesn’t cash flow, but if you look at smaller properties (townhouses) or properties with more than one suite (house with basement suite or garage suite or multifamily) then they do.

    Sorry I can’t comment on farmland. 

    1Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    5y

    @Justin Sheppard one of the big issues with the 1% rule or the 2% rule is that you have to know what pro forma rents could be if you are looking at existing inventory. In Chicago where I am investing, it is not at all uncommon to see mom and pop land lords who have rents of $200-300 below market rate. I personally run the numbers based on the pro forma rent because I would never buy something if I only ran numbers based on "as is" rents. 

    0Reply
  • Nate Sanow
    I​nvestor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Justin Sheppard

    Disclaimer: I’m a little biased and a salesman at heart

    That said, Tulsa, Oklahoma and Oklahoma City provide a lot of 1-2% opportunities. Certainly a lot of America’s “Midwest” or simply non coastal areas do too.

    Not sure if you are looking to come south of the border or not. I’m just a proud believer in my local market :)

    0Reply
  • Doug Spence
    Investor · San Diego, CA · Member since 2016 · 1k+ posts · 975 votes
    5y
    Originally posted by @Nate Sanow:

    @Justin Sheppard

    Disclaimer: I’m a little biased and a salesman at heart

    That said, Tulsa, Oklahoma and Oklahoma City provide a lot of 1-2% opportunities. Certainly a lot of America’s “Midwest” or simply non coastal areas do too.

    Not sure if you are looking to come south of the border or not. I’m just a proud believer in my local market :)

     @nate sanow Do you see properties in Tulsa that cash flow well and are in C or better neighborhoods? I'm doing all of my marketing in OKC right now, but open to expanding to Tulsa if there is opportunity. Thanks!

    2Reply
  • Nate Sanow
    I​nvestor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Douglas Spence

    Yessir more often than not, yes. Now, everything is compressed here as much as anywhere else with limited inventory.

    So as they say sometimes the deal isn’t found, it’s made.

    If you want to connect, I’ll point you to others with opportunities or talk to you about some I come across.

    2Reply
  • Mike Henricks
    Specialist · Edmonton, AB · Member since 2020 · 17 posts · 7 votes
    5y

    @Shrey A.

    I went through a similar dilemma not long ago. I was really stumped on how to make real estate investing work in Canada. I looked at similar locations to you and was really sold on Windsor. @Zorya Belanger was able to convince me that Edmonton had potential and after looking into it deeper you most definitely can cash flow in Edmonton.

    Zorya recommended I read Real Estate Investing in Canada Using the ACRE System by Don Campbell and it is a must read for Canadian real estate investors. I highly recommend as well that you pick up a copy and give it a good read.

    I am far from an expert and very new to REI but if you have specific questions (mostly on the Edmonton or Windsor markets) feel free to message me and I will do my best to get you an answer, and if I don't know I will direct you to someone who will!

    Feel free to message me anytime! :)

    1Reply
  • Mike Henricks
    Specialist · Edmonton, AB · Member since 2020 · 17 posts · 7 votes
    5y

    Sorry I commented this on the wrong post and don’t know how to delete this haha. I am new to BP. Whoops.

    0Reply
  • Gail W.
    Investor · IL · Member since 2019 · 151 posts · 135 votes
    5y

    I have owned Farmland for 34 years.You really can't compare this type investment to residential, especially by the 1% rule. I have never used the 1% rule when looking to buy farmland but the farm I am holding now is at .46%. The great thing about farms is that tenants, at least here in my area are very easy to find, and they tend to take the farm for life as long as you are happy with the arrangement. I have never needed to look for a tenant/farmer they will contact me. The bad thing is you should not expect a positive cash flow for as long as you have a mortgage on the property. I could talk all day about land as an investment, if you have specific questions message me.

    1Reply
  • Justin Sheppard
    OP
    Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes
    5y
    Originally posted by @Nate Sanow:

    @Justin Sheppard

    Disclaimer: I’m a little biased and a salesman at heart

    That said, Tulsa, Oklahoma and Oklahoma City provide a lot of 1-2% opportunities. Certainly a lot of America’s “Midwest” or simply non coastal areas do too.

    Not sure if you are looking to come south of the border or not. I’m just a proud believer in my local market :)

    Hey Nate, thanks for the feedback. I'd be interested in chatting with you to learn more about OKC. I enjoy myself some CP3 and Shai Gilgeous Alexander OKC Thunder basketball, which makes me a bit more excited about the idea of investing there. I'll reach out!

    1Reply
  • Justin Sheppard
    OP
    Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes
    5y
    Originally posted by @Gail W.:

    I have owned Farmland for 34 years.You really can't compare this type investment to residential, especially by the 1% rule. I have never used the 1% rule when looking to buy farmland but the farm I am holding now is at .46%. The great thing about farms is that tenants, at least here in my area are very easy to find, and they tend to take the farm for life as long as you are happy with the arrangement. I have never needed to look for a tenant/farmer they will contact me. The bad thing is you should not expect a positive cash flow for as long as you have a mortgage on the property. I could talk all day about land as an investment, if you have specific questions message me.

    Hi Gail, thanks for this great feedback. I agree, its like trying to compare apples to oranges. Similar to your area, finding good tenants is a very easy task here in Saskatchewan (assuming the land is of average quality or better). I like the idea of having cash flow, which has me leaning towards putting more in as a downpayment on a land purchase in order to generate some positive cash flow. You also can't beat the fact that, as long as your tenant is doing a good job, there is no depreciation happening to the dirt. I'm curious, what is the price per acre in your area for average quality grain producing land?

    Take care!

    Justin

    0Reply
  • Justin Sheppard
    OP
    Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes
    5y
    Originally posted by @John Erlanger:

    @Justin Sheppard  The 1%-2% rule does not tell you how a property will perform.  It is a valuation tool.  If properties are selling at 1% of market rents then $1,000 rent should sell for $100,000.  In a 2% market $1,000 rent will sell for $50,000.  In a .5% market that same $1,000 rent will sell for $200,000!  Obviously if these numbers can be documented it is saying investors anticipate being more profitable in .5% markets.  Why would you want to invest in less profitable markets?

    Hey John, thanks for the reply! I understand that the 1%-2% rule is a valuation tool. My question is more so trying to find out areas where the 1-2% rule is currently attainable, and I used the local examples to show how things are in my province. To answer your question, I'm considering investing in land due to the ease of management and little-to-no depreciation on land. That and also the fact that, once it is paid off, it is pure cash flow with no costs aside from taxes. I'm curious, can you recommend some areas where you are finding residential opportunities that are hitting the 1% to 2% rule? I've been told a few times that non-coastal mid-west cities in the USA are good for this, but I'd be interested to hear your thoughts.

    Take care!

    Justin

    0Reply
  • Account Closed
    Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    There are 100s of US cities and towns where you can find 1-2%. Are you looking for a list of specific places? One was released not that long ago I think they called it BP insites or something.

    0Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    1% or 2% (or GRM = 8.5 or 4.25) is great in a vacuum. Higher return is better.

    However, like MPG in a car, a high number is great, but may you can get a van carrying 10 of your kids to soccer practice cheap with low MPG?

    If you'

    re able to get something with a lot of potential and upside, I'd back off on the 1% rule.

    0Reply
  • Justin Sheppard
    OP
    Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes
    5y
    Originally posted by @John Erlanger:

    @Justin Sheppard

    1.  What kind of land rental can you do from long distance?  Do you have a plan?

    2.  This will probably be 50 miles away from an airport and no local lodging.  Will you go to check that they aren't using your land for a dump?

    3.  Depreciation is a landlord benefit.

    4.  If you need to sell those costs will probably outstrip any cash flow you received.\

    5.  Why do you want to invest in a low demand area?

     Hey John,

    Great questions, see answers below.

    1. I can negotiate either a cash rent agreement on a per seeded acres basis, or I can negotiate a crop-share joint venture if it is in an area with a farmer that I know and trust (higher risk, higher reward with crop share).

    2. I'm looking to invest within an hour radius of my home city of Regina, SK or Saskatoon, SK. Travelling to see the land a few times a year would not be an issue. I also don't think that any respectable farmer would pay $8,000.00 per year to use the land as a dump, considering farmers are renting the land to make money. 

    3. Do you mind elaborating on how depreciation is a benefit? I suppose if you are putting a certain amount of rent money towards cap-ex over time, I can see what you are saying. The benefit to land is that there is no cap-ex to save for, which to me is a large benefit in farmland ownership.

    4. I would be buying and holding for the long term (20+ years, likely to pass onto my family when I'm no longer around), so closing costs aren't really a concern for me. If for some unforseen reason I had to sell, I currently have my license to sell real estate here, so I could potentially save all realtor fees if I was able to broker the transaction myself, and Sellers legal costs on land are very minimal.

    5. Farmland in general is definitely not low demand, so I'm not sure what you are getting at here. The world definitely isn't getting any less hungry, and you can't build more farmland (like you can build more townhouses, for example). The supply is truly finite. Saskatchewan supplies the world with a tremendous amount of food, and I can only see the demand for this land growing as populations grow across the planet over time, which equals more mouths to feed.

    0Reply
  • Gail W.
    Investor · IL · Member since 2019 · 151 posts · 135 votes
    5y

    @Justin Sheppard

    Here in our area average quality land is going for $4200-$4800 per acre. That would be ground producing corn at150 bushel per acre average. Just a few miles North I have seen ground going for $9000-$11000 per acre.

    I get cash rent, my contract calls for me to add lime as needed. That is the only maintenance cost I have. The tenant mows ditches and maintains the fence row.

    @John Erlanger

    There are quite a few people who own land in my area from several hundred miles away. There was a man who came down from Chicago in a white limousine a couple of times a year to look at his property in the area. As far as low demand I have to disagree. I have only needed to find a new tenant once on a piece I owned for 20 years, and the other two properties when I bought them, and all three times I had multiple offers. The one I took was with the tenant who farmed the first piece so he had all 3 farms at one time.  

    0Reply
  • Justin Sheppard
    OP
    Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes
    5y

    @Gail W.

    The price per acre here in Saskatchewan is quite a bit lower than your neck of the woods, primarily due to legislation that is extremely restrictive of foreign ownership of more than 10 acres of land. The highest price per acre for high end grain land has been $4,200.00 per acre, and that land was within a few miles of the capital city. Overall, the average is around $2,000.00 per acre here in Saskatchewan.

    0Reply
  • Justin Sheppard
    OP
    Saskatchewan, Canada · Member since 2020 · 18 posts · 3 votes
    5y

    @John Erlanger

    Hey John,

    Where did you see that I’m looking to invest in $50K to $100K properties? The scenarios I laid out were around $400K for a house and $175K for land.

    0Reply
  • Forrest Faulconer
    Real Estate Agent · Oklahoma City, OK · Member since 2020 · 471 posts · 462 votes
    5y

    @Justin Sheppard

    I would like to second that OKC is attainable for hitting that 1% mark, we bought a house in 2013 for $82,000 and after putting in some sweat equity and around $8,000 we were able to rent it out for $1,200, about 1.3%. I just refinanced it after it appraised at $151,000, at 75% LTV our new loan amount is $113,250. When we do decide to rent it out again, it will still hit that 1% mark.

    Hope that helps!

    Forrest

    1Reply
  • Will FraserPro Member
    Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
    5y

    What @Forrest Faulconer shared above is actually THE example that poked holes in my unwaivering faith in Rentometer.  The Rentometer report, filtered for non-comparable homes, said that Forrest's home should lease for $850-990 . . . to which he reported, "but we've had a tenant in it for the past two years at $1,100."

    Thanks to this example I learned to dig deeper and use a plurality of sources in order to determine rental values. 

    So, dig into the numbers BUT use a local industry ninja alongside the tools to make sure the tool is doing you right.

    0Reply
  • Forrest Faulconer
    Real Estate Agent · Oklahoma City, OK · Member since 2020 · 471 posts · 462 votes
    5y

    That's correct, as @Will Fraser mentioned, determining the right rent rate is multi-faceted. I originally looked at rentometer and was displeased with the rent average. So I started looking at some of the comparables in the area and set out to make my house "stand-out." Thanks to @Will Fraser's advice, we had it minimally but modernly decorated, had professional photos taken and I took a leap of faith and decided to market it above average. We had dozens of inquiries and I got to pick the best tenants for the house (and they were the best tenants). Sometimes pricing something higher gives an allure that draws people in.

    0Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    5y

    Houses in nice areas don't typically cashflow. You have to go for 2-4 units or buy houses in low income areas where the numbers look good on paper but often miscalculate tenant issues and costs from those issues. I personally am a fan of 3-4 units in nice areas and see this as a good way to grow your business faster then houses.

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