"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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  • Account Closed
    Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes
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    @Jay Hinrichs

    I don't know, I do consider it icing...but I make damn sure that I'm finishing the cake and getting the icing too!

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  • Account Closed
    Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes
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    @Jay Hinrichs

    If you focus on cities with the top population and job growth...the appreciation will likely come.

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

    @Jay Hinrichs is right. When you look at typical returns in SFR and MF, appreciation/sales proceeds should make up about 75% of the total return. That is typical. Cash flows is usually about 25%. Making sure you receive both types of return also lowers your investment risk.

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  • Account Closed
    Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes
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    Originally posted by @Mehran K.:

    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!

    Mehran,

    I'd look for cities where you can obtain both (see my comment above).  Focus on cash flow cities, then choose the one that is also likely to provide good appreciation.  There are quite a few of these types of markets.

    Alternatively, you can invest in both "cash flow" (ex. Cleveland) and "appreciation" (ex. SF) markets, like other investors have done, but that isn't my approach.  I prefer to diversify my return, making sure I get both sources if return on each investment.  Then, no matter what the market does, I'm covered.

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

      Look at the very first city on your list... I owned two homes there.. one I paid 180k for and one I paid 500k the first one 1985  second one 1989... talk about would a could a should a

    I coulda rented them both out for slight negative cash flow to start maybe 100 to 200 a month... after about 5 years they would have been positive.. and today they would be 5k a month positive per house...  LOL.. owe well I used my tax free roll up and it all worked out in the end... Just can't arugue the CA investing advantages over time.

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  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
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    Originally posted by @Account Closed:

    I'd look for cities where you can obtain both (see my comment above).  Focus on cash flow cities, then choose the one that is also likely to provide good appreciation.  There are quite a few of these types of markets.

    Alternatively, you can invest in both "cash flow" (ex. Cleveland) and "appreciation" (ex. SF) markets, like other investors have done, but that isn't my approach.  I prefer to diversify my return, making sure I get both sources if return on each investment.  Then, no matter what the market does, I'm covered.

    Jon, thanks so much for that, I like this mentality and it's good to have both options to mix things up. That's sweet that you hit your goal to be free by 34, I'm turning 33 in a couple months and am working my way there :)

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  • Account Closed
    Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes
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    @Mehran K.

    Cheers! You seem like you're a bright guy and well on your way.  Feel free to get my free eBook that provides the step by step roadmap I took (see signature) or contact me directly to meet up and chat.

    I've review hundreds of SFR and MF deals and it is typical that sales proceeds (or cash out refi cash) generates 75% of the return, so Jay is right, the money you can generate from appreciation is immense and should primarily build your long-term wealth.

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  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
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    Yep! Focus on the areas that are growing, not declining :) Add growth trends to good price-to-rent ratios, and you are off to a great start for cash flow!

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