2% Rule seems crazy on this one...

34 Replies

@Bill Thomas Well, even the 1% RTV can be tricky as well especially when you consider the areas you are considering to invest.

Typically, one will struggle to find that the 1% RTV rule works in a Class A area let alone 2%. When looking at multifamily deals, I won't just use the 1 or 2% rule, as there are other strong parameters you might want to consider such as an opportunity for value-add or the kinds of Caps you are willing to buy at. 

Hope this helps. Good luck. Thanks! - Ola 

Don't believe everything you hear in the BP echo chamber. Half the people preaching these rules never even purchased a property. 

I am in the Charlotte, NC market and it’s so crazy here that if you buy in good entry level areas (think C+, B-) at 70% ARV all-in it’s hard to get 1-1.2% but you could potentially have 50-100k equity right out the gate.

My question is, even though I want to buy and hold, would it be better to acquire break even deals with the intent to rent them until I’ve met the 1031x requirements, then exchange them into a small MFU in the 16-20 unit range or even another similar equity play or am I just playing with fire?

The other option is to flip them, pay the tax, and take the profits to build my cash position until the market corrects, assuming it does.

For me, when good cash flow properties aren't available the answer isn't to buy properties in the hood to get closer to 2% rents. The answer for me is to look somewhere else completely. That's why I left MA.

Originally posted by @Jeshua Patrick :

I am in the Charlotte, NC market and it's so crazy here that if you buy in good entry level areas (think C+, B-) at 70% ARV all-in it's hard to get 1-1.2% but you could potentially have 50-100k equity right out the gate.

My question is, even though I want to buy and hold, would it be better to acquire break even deals with the intent to rent them until I’ve met the 1031x requirements, then exchange them into a small MFU in the 16-20 unit range or even another similar equity play or am I just playing with fire?

The other option is to flip them, pay the tax, and take the profits to build my cash position until the market corrects, assuming it does.

I would BRRRR them and have cash flowing properties with no money into the deals since you want buy/hold anyways.

You'll have continuous cash this way to keep buying more properties. Then eventually you can 1031 and move to MFR.

Otherwise I would flip them and build your cash position as a secondary option. Definitely wouldn't let them go though!

Something to keep in mind of buying properties that don't cash flow is you are likely increasing your debt:income ratio and won't be able to get financing after a few of these purchases  (depending on how much other income you have).

I guess I should have been a little more clear. The SFH’s I was referring to that were 1.0-1.2% deals at 70% ARV all-in are often break even cash flow deals at best due to the extreme rise in values over the last few years.

@Jeshua Patrick How many of these would you like to be able to purchase, and how many could you actually purchase before you reach a debt:income ratio that could prevent you from financing more?

Eric a lot of that depends on the lender. I have one lender that will give me credit up front for 75% of the expected rent towards my DTI. I can increase the number of units by buying 2-4’s conventionally and those will likely offer better opportunities at cash flow currently. On market and REO SFH’s are what is really insane here at the moment.

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