"2% rule" cities? Or should they be called, "Cities that Americans are Ditching?"

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"2% rule" cities? Or should they be called, "Cities that Americans are Ditching?"

Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

Came across this article today and thought it might make for a good discussion:

These are the Top 20 Cities Americans are Ditching

I think it’s funny that some of the cities that many investors suggest as good places to look for 2% rule properties (like Milwaukee, WI and Memphis, TN) are ranked on this list - this data certainly doesn't bode well for long-term rent growth or appreciation prospects on cash-flow properties! I think that this gives me pause give pause as I was previously looking to invest out of state in the larger cities that merely had the best price to rent ratios.

That said - the article does point out that some of these cities ARE gaining in population, due to things like immigration. But even with that caveat, I look at this and I see that Americans just don't want to live in certain places and are moving out in pretty large numbers. I wouldn't want to put my own money in a place that ranks highly for that metric, unless someone could convince me that some plan is place to change that.

Economic growth and the long-term prospects of my target market are definitely a huge part of my decision making process as I’m looking to pick a market for my first out-of-area real estate investment.

Anybody have any thoughts on how to choose a great market to invest in? 

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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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@Scott Trench Understood. The most experienced investors would say don't even think about it. Sure if you are local to that market then you could navigate it or partner up like Mehran K. does. Otherwise you are falling for the newbie cash flow trap. There is a reason many of those areas have vacant lots and boarded up homes. If locals could not make it work I doubt anyone from 1000 miles away will either. I understand you are looking for something in between. I am afraid you will end up with something less.  At your young investment age that makes little investment sense. If you need cash flow get a job or buy/start a business. If you want a real estate investment buy on long term fundamentals. That will win out 9 times out of 10 in the long run. 

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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    @Scott Trench

     Rent to value ratios are not always a predictor of profitability. The other metrics are ultimately superior typically.  Historically, some of the best investments have very low initial rent to value numbers. Not sure you would want to move money from your local market if that is the case. Location is primary and fundamental. If you are getting 2% from the start that could be an indicator that there is something fundamentally off with the investment. 

    Still even in the 2% areas there are locations that are appreciating. Real estate is so local. Minimize risk by capitalizing on local knowledge. If you can find better than Denver long term go for it. Otherwise you are already in a top tier market. Keep your investments top tier unless you want a job vs investment. There is a reason 2% is not taught in any accredited university or found in any textbook. 2% was coined for mobile home investing which makes total sense in that arena. Good Luck! 

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  • Jon Behlke
    Accountant · Hopwood, PA · Member since 2015 · 125 posts · 92 votes
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    I think each city on this list has to be evaluated individually, and furthermore, each locality within each city as well. 

    For example, I don't think NY, LA, or DC are in any danger of becoming ghost towns anytime soon, but if there's enough of a net loss of population, prices should begin to come down.  Catching a piece of the market at that point could be advantageous.

    Then there are other situations I find that need more investigation.  Cleveland/Elyria is seeing a decrease in population.  But right outside Elyria is Avon, which is booming.

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  • Mark Shaffar
    Real Estate Agent · Madison, WI · Member since 2015 · 328 posts · 88 votes
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    I think it is easy to misread the article. The populations of many of those cities are growing, but Americans are leaving. Manhattan is definitely not a 2% city and has a very healthy economy. Immigrants are moving into many of these cities faster than Americans are moving out. 

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  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
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    @Scott Trench That article you posted is somewhat misleading. Many of the cities in that article are actually still growing in terms of population, they just have large numbers of people leaving as well. Just as an example LA. In no way would it ever make the 2% rule, and it's population continues to grow. 

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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    Brandon Turner is a 2% guy. He does great I assume. From what I can tell he buys 2% near flood zones with a bad local economy and population growth. These would be considered challenging up hill long term investment fundamentals by most. This is perhaps more of a job vs investment. If he were buying in top tier sub 1% since the start....I would bet his net worth and eventual cash flow would be much higher on average.  Some of this is a matter of your location. You get what you can based on where you are at. 

     I can understand why someone would just want immediate cash flow....to live on or pay bills etc. Maybe buying a laundromat in a 2%+ area is a cash flow play that makes more sense vs buying a 80 year old housing structure and then LL your way to cash flow in that same market. 

    Now unpacking migration numbers is another story. LA has many who leave and arrive. It is not just a matter of net domestic migration but also who is leaving and who is lining up to take their place. 73% who leave make less than 50k and the majority who arrive now make 100k plus.  Thanks to foreign migration and wealthier domestic migration the voids are filled otherwise this would be a very concerning long term investment issue.  

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  • Scott TrenchPro Member
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    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
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    @Matt R. Thank you very much for these points. Here in Denver, CO, I use a 1% rule of thumb for my investments for exactly the reasons you stated. However, for every few dollars I invest in a top tier area like my own, I also want to invest a dollar or so for some more pure cash flow. I'd just like to do that in an area where the other factors are as likely as possible.

    @Anthony Gayden and @Mark Shaffar

     Thanks for pointing those things out about the article. I agree that it is easy to get confused by the title. It perhaps somewhat arrogantly states that "Americans" are leaving the cities in the list. In this case, I believe the article is referring to local, long-term residents, and in that sense, "immigrants" are not included. 

    Whether that's PC or not to refer to long-term locals as the "Americans" is another discussion, but it does make the point that immigrants are likely to have lower paying jobs and live "creatively" in units with far more people than your average American. This is probably not a great thing for rents.

    For our purposes, we are looking at where locals are moving to. If the people who have been there a long time are leaving, and the void is being replaced with immigrants, that doesn't leave me with confidence in these areas over the short to medium term.

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  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
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    @Scott Trench

    I have spent a lot of time thinking about LA/SF and I have come to the conclusion that since there is such opposition to increased building density within the area, the result is that we will see larger numbers of people sharing a single dwelling, larger percentages of the population renting, people spending the grand majority of their income on that rent, and eventually we will see a large exodus of lower income people from the areas as a whole as it will be too expensive to live. We have seen a lot of this already, but expect it to get even worse. 

    I would love to see California build with NYC type density, buy I know it would never happen.

    I think places like Phoenix and Las Vegas will see the most benefits as the lower income people leave and move to nearby places that are much less expensive.

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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    @Scott Trench Understood. The most experienced investors would say don't even think about it. Sure if you are local to that market then you could navigate it or partner up like Mehran K. does. Otherwise you are falling for the newbie cash flow trap. There is a reason many of those areas have vacant lots and boarded up homes. If locals could not make it work I doubt anyone from 1000 miles away will either. I understand you are looking for something in between. I am afraid you will end up with something less.  At your young investment age that makes little investment sense. If you need cash flow get a job or buy/start a business. If you want a real estate investment buy on long term fundamentals. That will win out 9 times out of 10 in the long run. 

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  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
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    I would definitely not invest in Milwaukee's inner city.  Some people do, but I don't have the stomach for it.  Not everyone outside of Milwaukee would know what is a "bad area" versus an "okay area" versus a "good area".

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  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
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    @Scott Trench

    These numbers are a little misleading especially for bigger cities.  Take NYC for instance. NYC probably has too many people and there is definitely not enough housing. Yet in 1910 Manhattan had 2.3 million people and in 1950 that number was 2 million vs, today's 1.626 million (as of 2013).  Obviously, in that time RE prices here have gone up substantially. Bigger cities constantly see the ebbs and flow here because of prices, changing jobs, moving to the suburbs etc. 

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  • Mark Shaffar
    Real Estate Agent · Madison, WI · Member since 2015 · 328 posts · 88 votes
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    @Charles WorthInteresting point

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  • Bryan C.
    Investor · Spokane, WA · Member since 2014 · 733 posts · 155 votes
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    Interesting points on misleading information.  I would say that every city will have its own pockets of good and bad neighborhoods.  That is why being a local investor pays off because you should be able to distinguish this when an out of town investor cant!  

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  • Carlos Ruiz
    Investor · Gilbert, AZ · Member since 2015 · 13 posts · 2 votes
    11y

    I agree! Knowing the market can give you a competitive advantage over other buyers. You know the areas, where to invest and have more information to determine whether it is a good investment or not. 

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  • Walker Hinshaw
    Investor · Denver, CO · Member since 2014 · 135 posts · 37 votes
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    @Scott Trench

     I have yet to see anyone suggest any real thoughts on how to identify good cities to invest in. It seems as though correctly picking a a good city to invest in is a lot like picking a stock - no matter what signs you see that make you think a city is undervalued, at the end of the day it is impossible to predict with any certainty because humans control the market and humans are inherently illogical creatures.

    I would love to hear from people who have placed bets on certain cities as to why they bet on that particular city.

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  • Tyler Herman
    Investor · Tacoma, WA · Member since 2015 · 84 posts · 42 votes
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    The article didn't mention either Jackson or Memphis but they're both on the map and have similar situations. 

    The population isn't shrinking, just more people moving out to the suburbs outside city limits. There are some neighborhoods that are not so great in both cities but also some good deals. 

    Wouldn't take anything from this article. 

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  • James B.Pro Member
    Investor · Monterey Area, CA · Member since 2011 · 150 posts · 81 votes
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    @Walker Hinshaw

    You're correct, I'm inherently illogical- haha.

    Seriously, I think identifying a city to invest in is an attempt at risk mitigation. I invested in Indy a few years ago to start out in because it is much less expensive than CA. I found people that I wanted to work with, and then shored up my decision with a few macro stats of the city, like major employers, population growth, and expected cash flow. Basically, I did it backwards.

    I just felt like I had to start investing somewhere and it has been good for me. In fact, I flew back there two weeks ago and visited the downtown area and I was blown-away at the growth, the energy, friendly folks, and the culture that has sprouted up! If there were some hills there to look at, I might even be tempted to move there for good. 

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  • Mark Shaffar
    Real Estate Agent · Madison, WI · Member since 2015 · 328 posts · 88 votes
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    @James B.I'm  a Midwest guy but moving from Monterey, CA to Indiana?:) 

    @Walker HinshawThere are a lot of factors that affect whether or not a city is good to invest in. What people are looking for in a rental are low vacancies (higher end tenants), high rent to price (>2%) for cash flow, and a good shot at appreciation (nice neighborhoods in growing cities). These are also unicorns, so BP is full of theories on what to prioritize. Some like me lean towards cash flow which is a lot easier to find in the Midwest because it seems to depend least on the illogic of guessing where the market is going- much luck Warren Buffet investing in value stocks. I guess illogic is a harsh word, but I do think there is more of a speculative play involved with betting on appreciation - akin to betting on a hot new tech stock. In other words, a cash flowing rental in a solid neighborhood has a good chance of being a good invest regardless of where the market is 5 years from now. Having said that, as @Matt R. pointed out, a Milwaukee investor like @Mehran K.

     might have made more money buying an undervalued house in CA thanks to strong appreciation than he would have made in Milwaukee with cash flow and mild appreciation. But we're just speculating, and he wouldn't have met @Dawn Anastasi

     which would be a shame:)

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  • Brandon Stevens
    Investor · Lexington, KY · Member since 2015 · 139 posts · 100 votes
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    Indeed the article is misleading only because there are 100 different reasons people are leaving and "ditching" was simply a poor choice of words. I personally like the long term prospects of milwaukee for a number of reasons. 

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  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    11y

    I'm a little late to this topic, but I have to agree with what @Mark Shaffar is saying in his last post. If I went all out purchasing foreclosures in California in the down turn, I'd be a pretty wealthy guy right now :). I learned about investing here on BP and was taught to focus on cash flow first, appreciation as a bonus to be safe. I started out that way and missed that boat here, but not in Milwaukee. I feel a little more knowledgeable about how things operate now where I'd be willing to purchase something local in the event of another price correction if it makes sense though. Maybe when I'm at a different stage in my investing, I'll be more open to more long term wealth-building plays. I'm just trying to leave my job for now though!

    Like @Dawn Anastasi mentioned, there are different areas of the city, like any city, that are better to invest in that wouldn't be AS affected by certain macro-economic changes.

    Despite the article listing MKE as place people are leaving, we're experiencing some appreciation in MKE right now. Maybe because of the influx of investors? Not sure, but it's there. The city is currently doing a lot of "projects" to spruce things up, which they weren't doing 2 years ago. Dawn and I were just chatting about how there are some apartment buildings being majorly renovated and even some new ones in the works to be built.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Mehran K.

    who ever coined the phrase " appreciation is a bonus" or "appreciation is the icing on the cake" well they should be shot.. LOL... this is so silly ... Appreciation over time is a huge factor in a long term rental investment.. Unless of course you NEVER sell.. And SFRs being SFR's over the course of 20 or 30 years owning them you will spend ( especially Mid west rentals that were bought cheap) the amount you paid for them in long term cap ex.

    So when you think you have a 40k rental.. over 20 to 30 years you will have spent another 30 to 40k in cap ex... this is for certain.. this is why you need some REAL appreciation to offset cap ex and make it even worth owning these things In the first place.

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  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
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    I see what you mean @Jay Hinrichs and appreciate you weighing, considering how much experience you have. With appreciation being a huge factor in long term rental investment, where does one walk the line in regards to that vs cash flow? With my goal to have enough income to safely leave my job and focus on other side businesses to create cash flow, I just focused on CF in my first round of purchases leading up til now. Any advice pearls of wisdom for the long game, with this in mind, is appreciated!

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Mehran K.

      I think what you will find is your honeymoon cash flow will not be what you think it will be your cap ex will be far greater and if you make no appreciation you will  wish to god you just stuck to CA investments is what I think   ...

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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    @Mehran K.@Jay Hinrichs Here is a hindsight stat..Top 10 luckiest mofos. I had a Vegas one that I backed out of for short sighted 2%...as Trump says "dummy"

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  • Robert Taylor
    Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes
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    If I ever did spend several minutes of my usually way too short time reading ANY of this genre of "Top whatever # of cities (or states, countries, etc) that are good/bad/declining/rising" that often pop up, I wouldn't admit that I'd foolishly wasted my time like that! They're simply various stats, metrics or whatever you'd like to call them, plugged into whatever rudimentary algorithm the author and whoever else is helping on this latest piece of garbage writing thinks makes some sense and this is what it spits out for results. 

    If the author had help, no doubt there were probably countless arguments over the design of the algorithm "hey you've got this all wrong where you count the number of "adult bookstores" per capita as a positive, cities with lots of them are dumps!" "No way you idiot, if there's a lot of adult bookstores, then that's very good news because that means people have so much extra money, they even pay for porn when you can get it free 24/7 at 34 million websites, you're a moron!!"

    Also, this brings up one of my minor pet peeves, which is that due to some major cities having wide boundaries while others are very small, so anyone going by CITY POPULATION instead of METRO AREA POPULATION would have to then think that San Francisco (meaning the city itself) is not a whole lot bigger than Milwaukee is. If you fly over the massive Bay Area followed by a Milwaukee area flyover, you'd see that Milwaukee is a fairly good sized city, but just a fraction of the size of the Bay Area!

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  • Account Closed
    Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes
    11y

    @Scott Trench

    FYI: I'm ditching those also.  I'd recommend focusing on researching states with the top 10 population and job growth and focusing on major cities on those states.  If you're looking for cash flow also do a price to rent ratio analysis of those cities.

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