Exceptions to the rules when buying

11 Replies

Hi all, I’m currently looking to find a “home run” buy and hold deal that will cash flow.  In my area, I really haven’t found anything because the market is currently so high.  I’m finding similar issues in other markets I’ve been assessing.

My question is this:  If you were to buy a house that didn’t meet the 1% rule for cash flow, what factors would you look at to break that rule, or would you ever buy a long term rental that didn’t meet the 1% rule?

There are some newer homes in my area (1-3 years old) that may be available at lower than market purchase prices, but they would generate between $2000-$2500 per month on a property that cost $300000-325000. Would you consider a property like this as a potential cash flow investment or only something to consider for appreciation?

Thanks
Scott

@Scott Kelley if you were buying in some of the high rent areas around San Francisco you would not get even a fraction of the 1% rule. So it is either don't buy, or compromise. I would not do that in many other places not even here south of Seattle-if Amazon or Boeing were to cave it is lights out.

I owned rental property for 30 years just South of San Francisco. It was paid for so the rent was OK. When I sold it in 2015 it made up for all the lousy returns from renting by a long shot.

I'm surprised, Scott that you can find properties here around Lacey, Tumwater etc for 300k that will rent for 2000. In my experience it is way worse that that. For me the market is too high to hope for natural appreciation. The only thing I have found that makes sense is distressed properties with a tired old LL. Too few of those I'm afraid.

Born, that’s generally what I’m finding but there are some places in Lacey that are in that range.  I’m likely to pull the trigger on one pretty soon.

I agree that depending on appreciation here is challenging.  I’d certainly look at Shelton, Elma, etc. but haven’t even found anything that cash flows in those areas.

I’m looking into Colorado, Arizona and some others just to try and find something that the numbers work on...
Originally posted by @Scott Kelley :

My question is this:  If you were to buy a house that didn’t meet the 1% rule for cash flow, what factors would you look at to break that rule, or would you ever buy a long term rental that didn’t meet the 1% rule?

There are some newer homes in my area (1-3 years old) that may be available at lower than market purchase prices, but they would generate between $2000-$2500 per month on a property that cost $300000-325000. Would you consider a property like this as a potential cash flow investment or only something to consider for appreciation?



I would only buy based on cashflow when I was new 2002-2005 or 6. I could find any day of the week a 5 bed MLS house for $105k that would rent for $1250 If I allowed pets. $1250 at the time was well above avg.

As the years went by, I started focusing on equity capture. The purchase needs to be made at below FMV. These were usually cash or seller-financed buys from tired LLs. I'm ok breaking even when purchasing at 85ish% of 30-day market value. I also factor in (fudge?) principal paydown. Equity is more important to me now than it used to be when I was new. 'Cash-flow' can be inflated with long loan terms that keep you in debt forever.

Those new builds you mentioned look worth looking into further. With a 30yr loan at a low rate, they may pencil. How much below market value do you think you could buy at? Buying below FMV is what's important to me in this market.


I wouldn't use 1% as a rule so making an exception to it is fine. I always look at area first and make sure that it will be something easy to attract tenants and be in demand. 

Thank you all for the input.  @Frank Wong , what things do you look for in an area? What financial metrics do you use?

@Steve Vaughan , I think I can pick one property up for about $15k under market value. It's a SFH built in 2016 and I'm confident I could get it rented quickly. I just need to keep the owners open to my terms.

@Scott Kelley so the likelihood of picking up a newer home under market value is unlikely if it's on the MLS or has wide exposure to buyers. In reality, if it hasn't sold, it's above market value. You just don't know why. Until you know why, don't buy as you are likely paying OVER market for a problem property or area. Generally speaking, newer homes make poor rental investments. There are exceptions but I would place more stock in that rule than the 1% rule personally.

The best insurance against over paying is location. The 2nd best is location and location is also the 3rd best insurance against over paying. I know of a 6 unit property in my market that sold in 1974 for $75k. It sold on the open market a few years ago for $850K and needed lots of work. I am sure that they owner selling the property forgot if he over paid or not. There are similar units in my same state that are still the same value as they were in 1974. In some cases they are abandoned and vacant and it would cost more to repair them then they are worth. The adage is "buy the worst property in the best area you can afford". Easy to say but sometimes hard to pull the trigger.

Hope you get it figured out for you.

@Scott Kelley

Cash flow always. If their is no cash flow then you are just gambling and it’s all just wishful thinking of the uncertainty of the future. Market is already at the peak. without cash flow, What’s your exit strategy. If you buy it at 300k and next year it’s only worth 250k. You gonna pay mortgage outta your pocket? Just because everyone is buying doesn’t mean you have to buy it. If there is no turnkey property than maybe look into fixer upper one. One that will give + cash flow. If you can’t find any, play the waiting game like rest of us.

Personally I wouldn't go too far below the 1% rule with one exception; if you picked up a nice piece of equity capture on the purchase. If that were the case it could make sense but the game plan would be to rent a couple of years, 1031 to get the equity capture out and put it to work somewhere where it was making a return.

Originally posted by @Scott Kelley :

Hi all, I’m currently looking to find a “home run” buy and hold deal that will cash flow.  In my area, I really haven’t found anything because the market is currently so high.  I’m finding similar issues in other markets I’ve been assessing.

My question is this:  If you were to buy a house that didn’t meet the 1% rule for cash flow, what factors would you look at to break that rule, or would you ever buy a long term rental that didn’t meet the 1% rule?

There are some newer homes in my area (1-3 years old) that may be available at lower than market purchase prices, but they would generate between $2000-$2500 per month on a property that cost $300000-325000. Would you consider a property like this as a potential cash flow investment or only something to consider for appreciation?

Thanks
Scott

A few reasons to buy something that doesn't cash flow all that well are

  • High quality property
  • High quality neighborhood
  • Neighborhood you think has a shot and gentrifying
  • Great financing terms 

Thank you all for the input.  I'm still out there looking every day.  I'm sure something will come along that meets my requirements.  I'm really looking out of state now.

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