1% Rental Rate for real?

Investor · San Francisco Bay Area · Member since 2019 · 119 posts · 79 votes

How realistic is this? I haven’t found many properties that would fall into this category unless I look into some not too awesome neighborhoods

Additionally I remember hearing from someone that it’s really 1.3%

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Nathan GesnerBusiness Member

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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

1. You bought your $8 million property in Houston, not San Francisco.

2. You bought an $8 million property with a company that manages 1,500 units. The OP is probably a beginning investor trying to find 1-4 units.

3. I did a quick search of multi-family properties priced at $7 - $9 million in Houston and San Francisco. $7.5 million will buy you 12 units in San Francisco on a 3,100 sq.ft. lot. That same money will buy you 143 units on 6 acres in Houston.

Just because you hit the 1% mark on an $8 million property in Houston doesn't mean the OP can find a 1% property in San Francisco as a beginning investor. In fact, I'm willing to bet you can't find one in San Fran for $8 million which is why you're buying them in Houston.

Maybe I missed some hidden nugget of wisdom in your post but it sure sounds like you just hopped on to pump your ego.

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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
The 1% rule is a general rule of thumb that says you should look for properties that rent for 1% of the purchase price ($200,000 home rents for $2,000).
In San Francisco it is probably easier to find a unicorn. It's hard to find one in my town of 9,000 where the median home price is $260,000 but I have found some.
There are certain areas of the country where it's easy to find a 1% property (you can even find some 2% properties) but they are usually lower in quality, in rougher communities, or in areas that historically do not appreciate.
I've found it generally true that markets that appreciate well don't cash flow well. Markets that cash flow well typically don't appreciate well. Choose what works for you.
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Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
6y
Originally posted by @Austin Largusa:
How realistic is this? I haven’t found many properties that would fall into this category unless I look into some not too awesome neighborhoods

Additionally I remember hearing from someone that it’s really 1.3%

The market already built that into the price. Not just that though, also the probability of a boat load of appreciation. All of that and more, the TOTAL value proposition of the property, is built into the price.

Midwest is a pure "cashflow is king" area because appreciation is so unlikely.

SF proper is basically a pure "appreciation is king" area.

Areas in the "Greater" Bay Area are a little more balanced.
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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
6y
Originally posted by @Austin Largusa:
How realistic is this? I haven’t found many properties that would fall into this category unless I look into some not too awesome neighborhoods

Additionally I remember hearing from someone that it’s really 1.3%

I just bought the coolest property yet. BEAUTIFUL 4 story historic building in the Warehouse district of downtown Houston. Lobby looks like an art gallery. Underground parking. Elevator. Roof top deck. Awesome units etc.
already fully occupied. No deferred maintenance.
Paid $8m. Has a 90k rent roll.
So you don’t have to buy in a C area or a “value add” property to get the “1% rule”. In fact if you can’t buy at 1% there is very little chance you’ll make money
This property, even at a better-than1% wasn’t my best. The property before was $6m and has 120k+ rent roll. But that’s a C property in a C+ area
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John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
6y
@Austin Largusa it is a pretty common theme to hear folks from the west coast that are unsure where to look for cash flow. I think the 1% rule is not the most helpful rule personally. Here in the Chicago suburbs, I routinely am selling deals that are at 1.2-1.5% price to rent ratio. The real estate taxes play a huge roll here, and some of the deals that are 1% are not very good deals due to the taxes.
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Brian Garlington
Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
6y
@Austin Largusa It sounds like you are trying to find the 1% rule in the Bay Area, correct? IF so, yes, you can find it, but you are also correct in that you will need to look at some not so nice neighborhoods in the East Bay. I will NOT name any areas or towns specifically, but I will say with great confidence if you look at a triplex in a D or F neighborhood in a non-rent control area of the East Bay you will find it.
Before you get too depressed, just also realize that ........
As others are pointing out, there are other areas of the country where you can find the 1% rule all day long....midwest
Even in the areas of the East Bay I am talking about property values have appreciated....I know of people that bought in deep East Oakland 3 years ago that have had their properties appraise for 24-28% more than what they bought them for and they made zero improvements. Now this is not something to necessarily be counted on in the coming years because it is anticipated that late 2020 or early 2021 is when the "correction" will come, but that is something to think about.
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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
6y
Yield in any investment vehicle is a function of risk. So areas that have high demand (demand is just one of the many factors of risk), like the Bay Area for instance are going to have really low yields. Areas with lower demand, and much higher risk, like Detroit for instance, will have much higher yields.
Now what is investing? Investing is deploying capital to achieve a desired return as measured against your risk tolerance and goals. So what any investor should do is define their goals (many do this) and then define your risk tolerance (very few do this) then deploy your capital into markets and assets that fit your risk tolerance. Do not simply look for maximum yield if that does not fit your risk tolerance. Conversely if your risk appetite is higher than your market, then take on more risk. What you can not do though, is expect the yield of a high risk asset/market to be available in a low risk asset/market.
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y

1. You bought your $8 million property in Houston, not San Francisco.

2. You bought an $8 million property with a company that manages 1,500 units. The OP is probably a beginning investor trying to find 1-4 units.

3. I did a quick search of multi-family properties priced at $7 - $9 million in Houston and San Francisco. $7.5 million will buy you 12 units in San Francisco on a 3,100 sq.ft. lot. That same money will buy you 143 units on 6 acres in Houston.

Just because you hit the 1% mark on an $8 million property in Houston doesn't mean the OP can find a 1% property in San Francisco as a beginning investor. In fact, I'm willing to bet you can't find one in San Fran for $8 million which is why you're buying them in Houston.
Maybe I missed some hidden nugget of wisdom in your post but it sure sounds like you just hopped on to pump your ego.
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Austin Largusa
OP
Investor · San Francisco Bay Area · Member since 2019 · 119 posts · 79 votes
6y
@Brian Garlington def not looking for investments in the Bay. A house in my neighborhood that should sell for 360 just sold for 520. No way I can afford these right now 🤣🤣
I’m looking in the south and working with a realtor, good neighborhoods don’t always fall into the 1% rule. They are in strong and growing economies with job growth increasing and strong school systems. That’s why I was asking
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John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
6y
I live in the south (middle Georgia) and wouldn't purchase a property that didn't meet the 1% rule. I realize rental returns and housing markets in general are regional. With low bank interest rates and a volatile equities market, more and more monies are finding their way into real estate investments and it has made finding deals difficult in many areas. We've been shopping for over half a year for another property and just haven't found the right one yet. But I'm patient, if I can't find what I want, I'll just hold off until I do.
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Toby Stanberry
Van, TX · Member since 2018 · 4 posts · 0 votes
6y
@John Teachout. Exactly! If you don't find what you are looking for.....HOLD OFF!
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Andrew Ashby
Investor · Orlando, FL · Member since 2016 · 355 posts · 380 votes
6y
Originally posted by @Nathan Gesner:
The 1% rule is a general rule of thumb that says you should look for properties that rent for 1% of the purchase price ($200,000 home rents for $2,000).
In San Francisco it is probably easier to find a unicorn. It's hard to find one in my town of 9,000 where the median home price is $260,000 but I have found some.
There are certain areas of the country where it's easy to find a 1% property (you can even find some 2% properties) but they are usually lower in quality, in rougher communities, or in areas that historically do not appreciate.
I've found it generally true that markets that appreciate well don't cash flow well. Markets that cash flow well typically don't appreciate well. Choose what works for you.

Couldn't have said it better myself. I happily buy small multi-family in rougher areas for cash flow (1.5-2% deals). However, I'd say if you want to target SFRs you might want to target B class areas for 1% deals where you might have better chances of appreciation.

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Kyle Nelson
Polson, MT · Member since 2017 · 115 posts · 105 votes
6y
When I first started listening to biggerpockets, there was often talk of the 2% rule, this left me discouraged that I couldn’t find any deals anywhere close to that. Fast forward a few years and now I’m having a hard time finding 1% deals while I missed out on many that would have been 1%+ the last few years. It doesn’t hurt to play it safe, but know your numbers and what you need to get the deal to work and this will help you sort out deals faster and more efficiently. Some 0.9% deals are great for many markets , if you hold fast to certain ideals than you might miss out on one of the most important things any investor has, time.
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
Originally posted by @Kyle Nelson:
When I first started listening to biggerpockets, there was often talk of the 2% rule, this left me discouraged that I couldn’t find any deals anywhere close to that. Fast forward a few years and now I’m having a hard time finding 1% deals while I missed out on many that would have been 1%+ the last few years. It doesn’t hurt to play it safe, but know your numbers and what you need to get the deal to work and this will help you sort out deals faster and more efficiently. Some 0.9% deals are great for many markets , if you hold fast to certain ideals than you might miss out on one of the most important things any investor has, time.

When the market changes, you'll see a lot of people losing their shirts and getting out of the game. People that play it safe will survive and probably pick up some home-run deals from people that over-extended.

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Kyle Nelson
Polson, MT · Member since 2017 · 115 posts · 105 votes
6y
Originally posted by @Nathan Gesner:
Originally posted by @Kyle Nelson:
When I first started listening to biggerpockets, there was often talk of the 2% rule, this left me discouraged that I couldn’t find any deals anywhere close to that. Fast forward a few years and now I’m having a hard time finding 1% deals while I missed out on many that would have been 1%+ the last few years. It doesn’t hurt to play it safe, but know your numbers and what you need to get the deal to work and this will help you sort out deals faster and more efficiently. Some 0.9% deals are great for many markets , if you hold fast to certain ideals than you might miss out on one of the most important things any investor has, time.

When the market changes, you'll see a lot of people losing their shirts and getting out of the game. People that play it safe will survive and probably pick up some home-run deals from people that over-extended.

I absolutely agree, my point isn’t to be more risky, it’s just that not all of these rules are as hard and fast as it seems sometimes. I myself play it very conservatively, but don’t hold to the 2% rule because for me those are way higher risk properties.

1 Reply
Michael Kay
CA · Member since 2018 · 83 posts · 44 votes
6y
Bay area is about wealth preservation than creation. You'll have to out of your way to places like Vallejo, Tracy, Santa Rosa to get something that will be a little bit more attractive, and even then it'll be hard.

Bit the bullet and get used to buying out of state.
1 Reply
Austin Largusa
OP
Investor · San Francisco Bay Area · Member since 2019 · 119 posts · 79 votes
6y
@Michael Kay I am looking out of state but even then it’s hard to find
Also I live 10 minutes from vallejo. Prices aren’t any better there
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Austin Largusa
OP
Investor · San Francisco Bay Area · Member since 2019 · 119 posts · 79 votes
6y
@Kyle Nelson
Thank you a ton! Very helpful response.
And to everyone on here thank you for helping out
0 Reply
Kyle Nelson
Polson, MT · Member since 2017 · 115 posts · 105 votes
6y
Even the quality turnkey companies are coming in at, or just under, the 1% rule. To me this is a good indicator that the market it a little too hot and needs to cool off. That’s just personal opinion though.
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James Wise
Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
6y
Originally posted by @Austin Largusa:
How realistic is this? I haven’t found many properties that would fall into this category unless I look into some not too awesome neighborhoods

Additionally I remember hearing from someone that it’s really 1.3%

You can find numbers like this all over the Midwest. Markets like Cleveland, Indianapolis, Detroit, Memphis, Toledo etc... Which is why this is where you'll find all of the turnkey providers.
1 Reply
Todd Powell
Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
6y
@Austin Largusa precisely why I dont owning SFHs! I love the leverage of a 4 plex and own 4 of them, as well as 5 and 8 plex with partner.
We exceed the 1% rule in a market that the rule does NOT exist! Working hard to find non MLS off market deals as well as owner financing with lower down payments! I have done this many times and the only way to achieve HUGE cap rates!
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Todd Powell
Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
6y
@John Warren you are correct about the West coast being a difficult place, but I always achieve it. It does take a lot of work however! Congrats on your RE empire, well done !!
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Natalie Schanne
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Austin Largusa - you can rarely find 1%+ in certain markets as a turnkey property. You have to make it a good deal with sweat equity (not necessarily swinging the hammer yourself.) In New Jersey and NOVA suburb of DC I have properties at 2% rent to purchase price. Both have strong economies, jobs, high rental demand and low vacancy rates. Remember in a downturn values can fall 30-50% within 2 years. My nova property I bought for 255k in 2009 after the last guy paid $475k 3 years earlier in 2006. When I bought it, there was another on the street also for sale for 250k. Anyway, you can rehab a property so you’re all in at a good price. Like I was all in about 150k on a property in New Jersey this year renting for 2750/mo now. I bought it for 80 and fixed it up for 60 plus holding costs. I sold it for 192k to an investor instead of renting it myself. But even he’s at 2750/192000 = 1.43% in a high rental demand area. I think Brandon’s main point with the rent is if it’s not going to cover mortgage plus property management plus repairs with extra cash flow to give you $$ back on your down payment, you should rethink that house as an investment. You don’t want to compete against people buying homes and who don’t think about the total cost of ownership and therefore bid up the price.
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Ray Johnson
Irvine, CA · Member since 2016 · 545 posts · 614 votes
6y
@Todd Powell dome parts of the West Coast are more than difficult. In CA we are in an environment where a 5-Unit Townhome style building, has been on the market 192 days and the owner just dropped the price a measly 55k, down from $2,125,000. While this deal makes no sense for most investors, I have a feeling the owner will wait this out until someone with a need for long-term capital placement comes along and pays close to what they want for the property.
You're finding off market deals in the Northwest, Have you tried your strategy in Southern California with success?
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Steve RozenbergPro Member
Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
6y
I that is more of a guide then something you should just be looking for and considering a good or bad deal

When you are looking at what type of deal is a good deal and where is a good deal for you. I would say that you need to be very cautious in asking this question, the reason is this is the "HOW" part of investing which in my opinion is the 2nd part of the equation.
I think you need to focus on the first part of the equation which is the “Why”.
Focusing on “YOUR" goals and what you want as a result of owning real estate is the most important. Sit back and ask what and how your life will be impacted as a result of owning real estate assets. The result of owning is what?? is it cash flow, appreciation, 1031, pass down to family as a legacy, this is also what your exit strategy will be. Not many people think about the end goal and the exit strategy when looking at deals. I know because I was one of those people. I kept asking if a certain deal was a good or bad deal and would go with concensus of people and make my decision. However if I ever created goals and an exit strategy then I would have realized that these properties did not align with my goals. I think it aligned more with their goals which to no fault of their own, were not even close to my goals.
So my strategy (my “How”) did not align with my goals (my “Why”).. and this was disastrous for me.
Focus on the goal end destination. Then you build your strategy that’s going to get you to your goals it’s kind of like where you’re driving to is the end destinations and the freeways are the strategy that will get you there.
No one ever asked or advised me on this and it almost made me bankrupt. Don’t ask if it’s a good or bad deal, have your definitions and strategy set first. Then focus on the market / city that will get you to your goal based on the strategy. That’s my advice I give to owners and leads that want to buy or learn to buy investment properties, we manage thousands of properties and 50/60% of our clients are new to real estate or learning how to truly build wealth and do not live locally or in the same state or country. I always stress them knowing what is a good deal for them, not for me. To me that’s helping people build wealth, not just telling them to buy or not to buy.
Good luck to you
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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
6y
Originally posted by @Nathan Gesner:

1. You bought your $8 million property in Houston, not San Francisco.

2. You bought an $8 million property with a company that manages 1,500 units. The OP is probably a beginning investor trying to find 1-4 units.

3. I did a quick search of multi-family properties priced at $7 - $9 million in Houston and San Francisco. $7.5 million will buy you 12 units in San Francisco on a 3,100 sq.ft. lot. That same money will buy you 143 units on 6 acres in Houston.

Just because you hit the 1% mark on an $8 million property in Houston doesn't mean the OP can find a 1% property in San Francisco as a beginning investor. In fact, I'm willing to bet you can't find one in San Fran for $8 million which is why you're buying them in Houston.
Maybe I missed some hidden nugget of wisdom in your post but it sure sounds like you just hopped on to pump your ego.

My point was that you don't have to be in a war zone or in some remote corn field to get 1%. People act like you have to pick negative return and pray for high appreciation, or get high return, but zero appreciation. I'm saying there are areas that you can get BOTH and was using my property as an example.

No need to pump my ego. I make it a point to be anonymous here. So maybe everything I'm saying is a total lie and I've never even bought a property.
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