Looking for Rental Property that meets the 2% Rule
Las Vegas · Member since 2020 · 2 posts · 3 votes
Looking for Rental Property that meets the 2% Rule
Most Popular Reply
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3yQuote from @Jacques Villars:
The 1% rule is a filtering device, not a method of calculating return. If you are evaluating a lot of properties, you can use a rule like the 1% rule to filter out the properties least likely to meet your requirements, then you spend time digging into the ones that are most likely to work for you. That's all it does. If you look at a property that appears to meet the 1% rule and never evaluate it farther than that, then you're making a big mistake.
Here's a guide that describes what good cash flow looks like and how to analyze a property.
https://www.biggerpockets.com/...
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46 Replies
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes3y
Milwaukee attracts OOS investors often for the wrong reasons. We do have a few areas with really cheap houses (sub 100k), but local investors know better, so while higher priced properties still sell with multiple offers, these are often months on the market before an OOS investor calls me and wants to write an offer..
The median home price in Milwaukee is 220k, anything below median is priced like this for a reason. While the cash flow might look great on 2% properties (or even 1%) it is very difficult to turn a profit long term and not stress out. The best I can put it in one punch line is: capex will exceed cash flow over time, aka money pit.
We (my team) work with a lot of investors and we know how to make people successful not only short term, but long term and a policy we have is that we require OOS clients to actually travel to Milwaukee so we can get on the same page in terms of neighborhood quality. This is usually eye opening and ends with: okay, now I know what you guys mean!
Milwaukee home prices are still lower, but demand is exceptionally strong - our list to sale ratio is still almost 100% on average, while most markets in the US have slipped back into 97% or less. With lower interest rates we might be in for a hyper competitive spring market again.
- 3yJared HottleBusiness MemberReal Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
I can find you some 2% rule properties here in Iowa. I think of cash-flow on a continuum and you have to give up some things to get to the 2% rule. Often times this can be higher vacancy, worse areas, older homes and more maintenance or little to no appreciation. It definitely makes sense for some people given their goals but you have to go in it with the right mindset.
Jared Hottle Real Estate59 Reviews - Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes3y
2% is to ghetto and 1% is acceptable why not go for 1.5% you get that in toledo, oh with the brrrr method
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes3y
Quote from @Joe Villeneuve:
Very true, but that house that's worth $150k that rents for $1500/month could have a PITI of $1000 and have $500/month in CF. On the other hand, if a $150k house rented for $3000/month, it could have a PITI of $3000/month, and end up with $0 CF.Quote from @Conner Olsen:
Quote from @Jacques Villars:
Hey All,
I'm an agent/investor in Las Vegas, flipped a couple properties, but looking to build a rental portfolio. For the first one I'm thinking I'd like to get one that cash flows well and unfortunately the market in Vegas doesn't really allow for much cash flow when factoring in a mortgage. I planning on using a conventional loan 20-25% down. I'm open to getting something anywhere in the US, if you know of areas with rent ready properties that meet the 2% rule, I'm in.
Any suggestions on area's, agents, and lenders are all welcome.
Thanks in advance
The rent to price ratio is not a good metric for determining the quality of a deal, especially in this market. It is a good metric to determine the rent compared to the price. For example let's say you went to the midwest and found a 50k house that rents for 1,000/month. My first question is, why is this property only 50k? We're coming off the greatest real estate appreciation in our lifetime and yet this house is only worth $50k? What's wrong with it? What needs to be repaired? What's wrong with the area? Why are tenants paying overpriced rent for this property if the average in this town trades at a 1% rent to price ratio?
Personally, I think the 2% rule is unrealistic if you are going through the traditional means. Maybe you find a $150k house that rents for 3k/month on Airbnb, that seems reasonable but I'd have a lot of hesitation with 2% rule with LTR.
To say that they are only preliminary analysis and are used simply as a filter, is asking for trouble. The 1% and 2% rules have absolutely no value at all, and worse, they could lead the user away from a good deal or into a bad one.You're absolutely right Joe. People spend so much time focusing on top line revenue when profit is way more important.
- Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes3y
In the current state of market - the only deals you are going to find that meet the 2% rule (on the as is #'s) are going to be in very very rough areas. And even those likely won't be at 2%. In today's market the 1% rule is more realistic.
- Investor · Santa Rosa, CA · Member since 2018 · 59 posts · 18 votes3y
Saw your post. I invest in Indianapolis. We buy properties add value, rent them to government programs.
we have the complete process in place. I have a team.
Anyone interested message me directly for more info.
I just closed on a quadplex Nov.22nd, had 1 offer accepted yesterday. Have 2 more offers out this week. It still blows my mind how many people are not doing this but I guess it just means more deals and opportunities for us.
reach out if you are interested.Rob
- Investor · Lahaina, HI · Member since 2012 · 47 posts · 35 votes3y
Quote from @Joe Villeneuve:
At best it's a poor filtering device. Depending on the market, it can filter out almost as many cash flow properties as the ones that don't. There's no direct relationship between the property value and the rent. Also, There's no common ratio between the rent and cash flow.Quote from @Nathan Gesner:
Quote from @Jacques Villars:
The 1% rule is a filtering device, not a method of calculating return. If you are evaluating a lot of properties, you can use a rule like the 1% rule to filter out the properties least likely to meet your requirements, then you spend time digging into the ones that are most likely to work for you. That's all it does. If you look at a property that appears to meet the 1% rule and never evaluate it farther than that, then you're making a big mistake.
Here's a guide that describes what good cash flow looks like and how to analyze a property.
https://www.biggerpockets.com/...There's no direct relation between rental values and home value? So, would a $10,000 a month rental sell for $100,000? Or, would a $1m dollar home rent for $1,000 a month?
Cash flow is a product of rent (net of expenses). Expenses and rent are linked to value, ergo, there is a relationship between cash flow and rent.
- Investor · Lahaina, HI · Member since 2012 · 47 posts · 35 votes3y
You're right about Vegas. In fact, the window has past even for selling (at least for the big prizes).
I wouldn't be buying in this market quite yet. Housing is ripe for a correction. Mortgage rate hikes will take time to filter through to values. There's a lag. The best time to invest is when there's blood on the street. Buying 'value' ensures long term growth, acceptable cap rates, and hedges against downturns. You'd be lucky to find a 2% rule in low risk markets (there is a relationship between risk and return).
If you want a return on your cash now, bonds and CDs are a better bet than real estate. You won't get growth until interest rates subside, but your yields will be higher than LV rentals.
- 3yJeremy TaggartBusiness MemberReal Estate Agent · Pittsburgh, PA · Member since 2014 · 850 posts · 646 votes
@Jacques Villars you don't want to own any properties in areas that give you 2% for something turnkey, trust me. I would focus on more Midwest markets if cash flow is your goal, but look more at the 1.25-1.5% range. Any higher than that you are going to be in an area where you will struggle to find tenants because it's so far from jobs, or an area where you don't want to be walking at night and you will have constant headaches from a mangement perspective.
DHRE- The Jeremy Taggart Team590 Reviews - Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes3y
Quote from @Jacques Villars:
Hey All,
I'm an agent/investor in Las Vegas, flipped a couple properties, but looking to build a rental portfolio. For the first one I'm thinking I'd like to get one that cash flows well and unfortunately the market in Vegas doesn't really allow for much cash flow when factoring in a mortgage. I planning on using a conventional loan 20-25% down. I'm open to getting something anywhere in the US, if you know of areas with rent ready properties that meet the 2% rule, I'm in.
Any suggestions on area's, agents, and lenders are all welcome.
Thanks in advance
Hey Jacques, you should check out Cleveland or Columbus. Your money will go very far, you'd be able to pick up a multifamily portfolio and start your cash flow. Not to mention Ohio is a landlord-friendly state.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Victor Saumarez:
Quote from @Joe Villeneuve:
At best it's a poor filtering device. Depending on the market, it can filter out almost as many cash flow properties as the ones that don't. There's no direct relationship between the property value and the rent. Also, There's no common ratio between the rent and cash flow.Quote from @Nathan Gesner:
Quote from @Jacques Villars:
The 1% rule is a filtering device, not a method of calculating return. If you are evaluating a lot of properties, you can use a rule like the 1% rule to filter out the properties least likely to meet your requirements, then you spend time digging into the ones that are most likely to work for you. That's all it does. If you look at a property that appears to meet the 1% rule and never evaluate it farther than that, then you're making a big mistake.
Here's a guide that describes what good cash flow looks like and how to analyze a property.
https://www.biggerpockets.com/...There's no direct relation between rental values and home value? So, would a $10,000 a month rental sell for $100,000? Or, would a $1m dollar home rent for $1,000 a month?
Cash flow is a product of rent (net of expenses). Expenses and rent are linked to value, ergo, there is a relationship between cash flow and rent.
So what you're saying is there is a formula, oh, like the 1% rule, that can automatically tell you what the rent will be based on the cost of the property? Ah,...no. There is no ratio. Buyers and renters are two different people, with 2 different sets of criteria. What a renter is willing to pay for a property could be more or less ratio wise than what a buyer is willing to pay for that same property. Just because someone who wants to "buy" a property will pay a specific dollar amount, doesn't mean that sale price will dictate a specific "rent". There is no formula that says: PV * R * Rent.
PV = Property Value
Ratio % = R
Rent = Rent
More important, even if there was, it wouldn't matter since the expenses have no relationship to the rents either. A house that rents for $2000/month in 2 different Markets, won't have the same cost of expenses. One might have a CF of $500 a month, and the other might have negative CF.Your example is poor at best. Your comparing apples and corn. The comparison should be based on the same house value in different areas. As in, will all houses where the PV is $100,000 rent for the same rent,...no matter where they are located?
- Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes3y
Quote from @Jacques Villars:
Hey All,
I'm an agent/investor in Las Vegas, flipped a couple properties, but looking to build a rental portfolio. For the first one I'm thinking I'd like to get one that cash flows well and unfortunately the market in Vegas doesn't really allow for much cash flow when factoring in a mortgage. I planning on using a conventional loan 20-25% down. I'm open to getting something anywhere in the US, if you know of areas with rent ready properties that meet the 2% rule, I'm in.
Any suggestions on area's, agents, and lenders are all welcome.
Thanks in advance
The way the market still is if you find something rent ready that meets the 2% you better be ready to buckle up. Because it’s gonna be a lucky ride.
or you’ll get lucky. - Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes3y
Hey @Jacques Villars - congrats on your previous flips and excited to hear that you're looking to buy & hold now. As I'm sure you've understood by now based on everyone else's comments, you might be limiting yourself too much with the 2% rule... even 1% itself might be tough unless you're looking at properties that are in bad parts of cities.
Alternatively, although I haven't done this myself, I've heard that smaller towns in the sunbelt are attractive and can yield higher cashflows. Not sure if it matches your 2% criteria, but it might be worth checking out.
- Real Estate Agent · Philadelphia, PA · Member since 2018 · 428 posts · 484 votes3y
@Jacques Villars 2% can exist in rougher areas with S8 vouchers and tenants who can contribute additionally to that rent OR if you are close to a military base or university where you can overcharge students
- South Bend, IN · Member since 2017 · 10 posts · 10 votes3yI’m in Indiana and haven’t seen 2% in a Few years on properties I analyze. 1% has become a stretch.
Quote from @Kerry Noble Jr:
Indiana.......not Indy but surrounding
- 3yPatrick DruryBusiness MemberReal Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
@Jacques Villars
Anything that meets the 2% Rule is typically in a D location and a complete war zone. - Rental Property Investor · Member since 2019 · 411 posts · 148 votes3y
@Jacques Villars look into rooming houses vs small multi to get that type of return. Ask me how I know...
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes3y
Quote from @Jacques Villars:
Hey All,
I'm an agent/investor in Las Vegas, flipped a couple properties, but looking to build a rental portfolio. For the first one I'm thinking I'd like to get one that cash flows well and unfortunately the market in Vegas doesn't really allow for much cash flow when factoring in a mortgage. I planning on using a conventional loan 20-25% down. I'm open to getting something anywhere in the US, if you know of areas with rent ready properties that meet the 2% rule, I'm in.
Any suggestions on area's, agents, and lenders are all welcome.
Thanks in advance
First find a time machine. Then rewind yourself to 2010. Then you will find 2% deals wherever you look.
- Investor · Lahaina, HI · Member since 2012 · 47 posts · 35 votes3y
Quote from @Joe Villeneuve:
Quote from @Victor Saumarez:
Quote from @Joe Villeneuve:
At best it's a poor filtering device. Depending on the market, it can filter out almost as many cash flow properties as the ones that don't. There's no direct relationship between the property value and the rent. Also, There's no common ratio between the rent and cash flow.Quote from @Nathan Gesner:
Quote from @Jacques Villars:
The 1% rule is a filtering device, not a method of calculating return. If you are evaluating a lot of properties, you can use a rule like the 1% rule to filter out the properties least likely to meet your requirements, then you spend time digging into the ones that are most likely to work for you. That's all it does. If you look at a property that appears to meet the 1% rule and never evaluate it farther than that, then you're making a big mistake.
Here's a guide that describes what good cash flow looks like and how to analyze a property.
https://www.biggerpockets.com/...There's no direct relation between rental values and home value? So, would a $10,000 a month rental sell for $100,000? Or, would a $1m dollar home rent for $1,000 a month?
Cash flow is a product of rent (net of expenses). Expenses and rent are linked to value, ergo, there is a relationship between cash flow and rent.
So what you're saying is there is a formula, oh, like the 1% rule, that can automatically tell you what the rent will be based on the cost of the property? Ah,...no. There is no ratio. Buyers and renters are two different people, with 2 different sets of criteria. What a renter is willing to pay for a property could be more or less ratio wise than what a buyer is willing to pay for that same property. Just because someone who wants to "buy" a property will pay a specific dollar amount, doesn't mean that sale price will dictate a specific "rent". There is no formula that says: PV * R * Rent.
PV = Property Value
Ratio % = R
Rent = Rent
More important, even if there was, it wouldn't matter since the expenses have no relationship to the rents either. A house that rents for $2000/month in 2 different Markets, won't have the same cost of expenses. One might have a CF of $500 a month, and the other might have negative CF.Your example is poor at best. Your comparing apples and corn. The comparison should be based on the same house value in different areas. As in, will all houses where the PV is $100,000 rent for the same rent,...no matter where they are located?
I think you are missing the point about financial ratios. Ratios are not infallible. They are only a guide and are mostly backward looking. Experienced investors know past performance is not a guarantee of future performance. Ratios are a guide and are often used 'relatively' or 'comparatively'. In fact, they are often ambiguous when viewed in isolation. They are not intended as fool-proof guarantees. However, if you are looking to invest, you ignore the 'numbers' at your peril.
Most comments above are suggesting the 1% rule as a 'first pass' filtering mechanism once you have chosen your location. This clearly makes sense.
More broadly, returns are built around 'expectations' of future performance. A simple analogy with the Dividend Discount Model shows that present value is arrived at by discounting future cash flows. This demonstrates a widely held belief, if you will, that cash flows and value are inextricably linked. The cash flow method of working backwards to arrive at an acceptable price using rental comps is also a useful valuation tool. The CRE industry uses the Gross Rent Multiplier (GRM). It simply divides fair market value by rent. If you know the going GRM you simply multiply gross rents by the ratio to arrive at value.
Values and rents are not necessarily arbitrary. They are fixed by markets acting efficiently—at least most of the time. Although there will be variability depending on many factors, rents and values do have a relationship. If they weren't we'd all be at sixes and sevens. I hope that makes sense.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesI am a firm believer in the numbers and in market analysis...full market analysis. These "first pass mechanisms" are misleading and a waste of time. The numbers that are used to calculate are incomplete and many times not applicable to the specific property in question. However, many investors are willing to use them...as short cuts and in the process find themselves following through on properties that lead them to a place not like the "short cut" pointed, or away from properties that would have been good deals.
Quote from @Victor Saumarez:
Quote from @Joe Villeneuve:
Quote from @Victor Saumarez:
Quote from @Joe Villeneuve:
At best it's a poor filtering device. Depending on the market, it can filter out almost as many cash flow properties as the ones that don't. There's no direct relationship between the property value and the rent. Also, There's no common ratio between the rent and cash flow.Quote from @Nathan Gesner:
Quote from @Jacques Villars:
The 1% rule is a filtering device, not a method of calculating return. If you are evaluating a lot of properties, you can use a rule like the 1% rule to filter out the properties least likely to meet your requirements, then you spend time digging into the ones that are most likely to work for you. That's all it does. If you look at a property that appears to meet the 1% rule and never evaluate it farther than that, then you're making a big mistake.
Here's a guide that describes what good cash flow looks like and how to analyze a property.
https://www.biggerpockets.com/...There's no direct relation between rental values and home value? So, would a $10,000 a month rental sell for $100,000? Or, would a $1m dollar home rent for $1,000 a month?
Cash flow is a product of rent (net of expenses). Expenses and rent are linked to value, ergo, there is a relationship between cash flow and rent.
So what you're saying is there is a formula, oh, like the 1% rule, that can automatically tell you what the rent will be based on the cost of the property? Ah,...no. There is no ratio. Buyers and renters are two different people, with 2 different sets of criteria. What a renter is willing to pay for a property could be more or less ratio wise than what a buyer is willing to pay for that same property. Just because someone who wants to "buy" a property will pay a specific dollar amount, doesn't mean that sale price will dictate a specific "rent". There is no formula that says: PV * R * Rent.
PV = Property Value
Ratio % = R
Rent = Rent
More important, even if there was, it wouldn't matter since the expenses have no relationship to the rents either. A house that rents for $2000/month in 2 different Markets, won't have the same cost of expenses. One might have a CF of $500 a month, and the other might have negative CF.Your example is poor at best. Your comparing apples and corn. The comparison should be based on the same house value in different areas. As in, will all houses where the PV is $100,000 rent for the same rent,...no matter where they are located?
I think you are missing the point about financial ratios. Ratios are not infallible. They are only a guide and are mostly backward looking. Experienced investors know past performance is not a guarantee of future performance. Ratios are a guide and are often used 'relatively' or 'comparatively'. In fact, they are often ambiguous when viewed in isolation. They are not intended as fool-proof guarantees. However, if you are looking to invest, you ignore the 'numbers' at your peril.
Most comments above are suggesting the 1% rule as a 'first pass' filtering mechanism once you have chosen your location. This clearly makes sense.
More broadly, returns are built around 'expectations' of future performance. A simple analogy with the Dividend Discount Model shows that present value is arrived at by discounting future cash flows. This demonstrates a widely held belief, if you will, that cash flows and value are inextricably linked. The cash flow method of working backwards to arrive at an acceptable price using rental comps is also a useful valuation tool. The CRE industry uses the Gross Rent Multiplier (GRM). It simply divides fair market value by rent. If you know the going GRM you simply multiply gross rents by the ratio to arrive at value.
Values and rents are not necessarily arbitrary. They are fixed by markets acting efficiently—at least most of the time. Although there will be variability depending on many factors, rents and values do have a relationship. If they weren't we'd all be at sixes and sevens. I hope that makes sense.
- Investor · Pittsburgh, PA · Member since 2011 · 115 posts · 43 votes3y
I have access to several properties that fit the 2% rule in Aliquippa, PA and Beaver County. I would love to explore providing turn key rentals. Just not sure how the deal would or should work. At any rate we are out saving 2 houses from condemnation if you would like to stop by and talk come around have some pizza, talk real estate.
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