2% rule for Asking Price

10 Replies

@Chris Garzino the 2% rule is almost impossible to find in today's market. The idea works for any asset class, but be very careful using this rule of thumb today. You will probably get pushed into lousy areas where the returns are all on paper and not in real life. 

@Chris Garzino it really depends on your goal and investment criteria. You might buy a .01% based on the purchase price compared to NOI and it could be the best deal ever

If you add value to it and increase the NOI by 5x, 10x, or 100x. The 1% or 2% rule is a quick way to judge a cash flowing asset but you need to fully evaluate and underwrite multifamily properties.

2% will be tough to find in this hot market and it should only be used a rough estimate of the cashflow. You will need to look more closely at the Cash on Cash, Cap Rate, and IRR when it comes to larger multifamily.

@John Warren How do you know the difference between returns "on paper" vs. in "real life"? Obviously, the initial analysis is done 'on paper', but how would you know what the 'real-life' returns are until you bought it?

Originally posted by @Derek Morrison :

@John Warren How do you know the difference between returns "on paper" vs. in "real life"? Obviously, the initial analysis is done 'on paper', but how would you know what the 'real-life' returns are until you bought it?

For rules of thumb like the 1% or 2% rule it doesn’t take into account reality.  Sure you can buy a place for 40,000 after rehab costs and rent it out for 800, but where is that on the sliding scale of A-D housing?  Take a A property at 1% and you are probably Nanking good amount of money and the tenants take great care of your property  probably stay for 2-5 years and don’t have issues paying rent on time. 

But a D property that is banking 2% has a tenant that moved every 12-24 months and when they leave you will spending 3/4 months worth of rent to fix what was damaged or worn out.   So your 2% becomes .5% and you get all the headaches of a lower priced property.   A roof costs the same per square foot whether it is a 30,000 home or a 300,000 home.  

I make money from my C class properties that have some issues paying on time but not where the D class properties are at all.

If given the choice I will start investing in B and A class areas and work with more reputable individuals on average  

 

@Derek Morrison I own a C-/D+ class apartment complex, and I can tell you that the returns are no where near as stable as stuff in B areas. My C class property did over 20% COC last year, but this year we have had five vacancies and had to fire a poorly performing property manager. Our returns will be poor this year, if they are even in the black. I share this because this particular deal actually met the 3% rule, not the 2% rule!