So there must be other places like my town. The average (decent shape) 2 family home is selling from 250k-325k. And the average rent is $1100-$1300. These numbers don't work out for the 1% rule. Everything I've ever read on here, or heard on the podcast is that if you don't make at least 1% a month you will lose money. The only way I can see these landlords around me making money is if they have owned the property for years before the prices inflated. The reason I've been thinking about this is because a 2 family a few down from mine has been lived in by a hoarder for the last 50 years, and no maintenance has been done to the property in this time. It literally looks like the Munsters house. He passed away a few weeks ago and i walked over to speak with the family who is here this week cleaning the house out. They are from Arizona, I'm in Connecticut. He voiced not wanting anything to do with the property, but when he asked me what I would pay for it, I said "in the 70's"... He almost just walked away from me. I couldn't get a hard number out of him, but he did mention a number around 140k. This seems outrageous to me. The entire house needs to be gutted, the entire exterior needs to be redone. The 2 car garage is cinder block, but the roof is caved in. Massive trees near the house. Plus the entire house is full. 3 floors of garbage. I've had my eye on this property for a long time, but I think it will need about 140k-160k to fix, do other people think my price in the 70's is low balling him? I think if the units were nice I could rent each floor for $1200. ($2400 a month total) I want to buy in my town because it is nice, it's just so expensive here.

I had an agent contact me today with 1% deals, both in the Central Valley, small towns. 1 is a 7 door deal (4 houses, 1 triplex), the other is a 4 plex. Trouble is the quality of the props and the tenant pool. So, you've got 7 doors at less than $70K per door, and rents over $700. But just yuck to operate them. Difficult tenant pool (small town poverty), old props that you can keep going but will be headache. So the 1% rule isn't everything. :)

Kevin, @David Faulkner is correct. Seems like you're on the right path. You just need a little fine tuning. I don't know if you have access to the MLS or Redfin.com or the equivalent. Study those markets. You will see a pattern between neighborhoods and the rent to property value ratio. Once you have a good understanding of these parameters, you will spot a good deal from a mile away. In the quest of doing your research, you may identify some investors who are getting some sweet deals that never hit the market. Wouldn't it be nice if you're in that circle? :>) What's the ARV of the property after you renovate it? That would determine whether or not you're low-balling the guy. As David mentioned above, buying in expensive markets can be very profitable compared to cheap markets. Once you got the formula figured out, I promise you will look at expensive markets with a different set of eyes. :>) Thanks for the mention David. Those 1% deals are doing good and on the verge of doing great. My partner and I got lucky this year. We just hope the luck will continue into 2016. The deals that I bought at the courthouse steps during the downturn are doing 1.4%-1.5% now. However, they're worth 2.5-3 times now so the rent to value is about 0.6%. :<(

Yep ... guess that means that (according to the rule) nobody ever makes any money in REI in CA, right? :)

Account Closed how are all those 1% deals in the Bay Area going for you? To the OP, buy-and-hold in nice (expensive) areas can be done VERY profitably, and Minh is the master. Forget about 1%, but beware of negative cash flow, and focus on value add. You seem to be on the right track, but need a little fine tuning to pull it off safely and sucessfuly IMO.

All over California, it is almost non-existent. That's 10% in fees for the flipping, 150k in repair, 270k in arv, you are there, 70k is enough. Unless you are confident you can sell it at 325 or more. I'd say 100k is a safe number, with a hoarder, you might need to remove down to the floor joist.

If ARV is 275, at an offer of 70 + 160 in repairs puts you all in at 230 or 83% of ARV. If you were to flip it, you wouldn't be making all that much after holding and transaction costs. If you were to hold it, it would hit your beloved 1% rule then, but what would it cash flow with all the expenses, financing, and income factored in? ... those are the hold #s you'd need to run. I like to invest in properties where both the flip and hold numbers work (one for plan A and the other for plan B). Then, look at the historic price and rent trends over the last 10-20 years and assume that both will revert to this mean over the next 2 years or so (if the market is frothy at the moment, this might hurt you, if it is a buyer's market it may help). Finally, use all these numbers, including purchase price, repairs, rental income, expenses, and sales price or cash out refi after X number of years (you can play with these parameters) and calculate IRR on the series (can use the excel function to do this) ... this is your total return, over the life of the investment, including ALL sources of profit. Even if you don't end up buying the place, I think doing this analysis, playing with the numbers, and seeing where and when your profits come will be a good exercise and inform your investment strategy. So, no I don't think that 70 would be low ball at all if these numbers are correct considering the work you'd be putting in and risk. That doesn't mean that it won't sell for more, just means that you probably don't want to pay more if this is what your analysis says. I haven't seen the property, but 160 in repairs would mean it is in ROUGH shape ... you may try scrubbing those numbers. I hope this helps!

I got a great deal on my house in Los Angeles (October 2012) but it wouldn't meet the 1% rule (close but not 1%). I'll rent the place out someday if I move - that will be easy. I believe Brandon likes to use the 2% rule - tough to do but many on this forum have achieved it.

Anywhere else the 1% Rule doesn't work out?

Kevin Gerace

OP

Investor · Wallingford, CT · Member since 2013 · 28 posts · 4 votes

10y

@Account Closed

this is a good point. I guess the main point is to make sure it positive cash flows, and is a good investment, not a headache investment. One town over I know I can find better deals, but i believe the tenant quality will go down. Not all of that town is bad, but a good part of it is. The closer you get to the center of town the worse it gets. However in my town, the closer you get to the center the better it gets. Strange how that varies so much town to town. Still I think i might be willing to pay more for this property because it is only 2 houses down and I've been thinking about it for years. I need to make sure I don't get emotionally involved and that the numbers still work.

Anywhere else the 1% Rule doesn't work out?

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