2% outside of Atlanta is it possible in 2019 ?

Question

Mostly just looking to find area outside of the Atlanta area that could possibly hit the 2% rule , places that I’ve considered Macon, griffin , dalton , maybe Cleveland tn , Athens , Columbus ect I guess I’m really trying to hit my state backyard instead of branching out to Milwaukee or Detroit, my main goals are I’m trying to replace my income passively by buying a couple of rentals I could buy & hold . I’m not focused on equit, I’m mostly focused on cashflow for now , once I can achieve that target number I need then I would focus more on properties that I may be able to get more of a equity play.  Tips & advice are definitely needed -

Georgui Kasaev · Answer

@Robert Collins Hello and welcome. Great questions. Everything is possible, 2% is a bit agressive for today's market. However, it is still possible in mobile home parks or if you deal directly with sellers. If it's on the MLS its usually not going to muster 2%. I am strictly speaking about the Athens market cause that is what I am most familiar with.

Robert Collins · Answer

@Lee Taylor thanks I’ve been considering Macon , I’m going to have to come there to Macon and get a feel for the area & market and try and network with some people there that may be able to put me around a good pm & gc

Lee Taylor · Answer

@Robert Collins Macon offers 2% opportunities fairly easily, but no appreciation. It’s very much dependent on area so knowing the market will be very important if you decide to invest there.

Josh McCullough · Answer

I bought an 8 unit apartment in Griffin in July that was 1.7% at the time of purchase. Its a 2% now and will be over 2% after January 1. Definitely look for value add!

Mark Durham · Answer

It's possible, but it's the exception rather than the rule.

Consider yourself fortunate when you find one, but don't expect (and build your biz model around) to find a lot.

Marcus Auerbach · Answer

2% means for example that you buy a property for $60,000 that will produce $1,200 in rent.

There are a few issues with that. First the intrinsic value of a property is land+sticks&stone+labor. If the house part (sticks&stones and labor) comes out to $150 per square foot (new) and you discount it, because it is used (about 33% national average) you are looking at $100 per square foot. On an average 1,200 sf starter home, that's $120,000 in house value. Plus whatever land costs and driveway and garage and landscaping, but let's ignore that for a second. So, how is this possible? If your purchase price is $60k and the structure is worth (discounted) 120k, that means that the land value is negative $60,000 - somebody will basically give you 60k to take the land, because it is so undesireable.

If the neighborhood is so undesireable, that someone is willing to give you $60,000 to just take the land, you will have a hard time finding a tenant, who is willing and able to pay top dollar - they would rather live elsewhere.

Second, cashflow is the most important, but often not the biggest of the 4 income sources you have as a real estate investor. The other three are: equity (de-leveraging), appreciation (forced and natural) and taxes. All three will be basically disabled when you invest in a 2% property.

In other words, your financial model does not work.

Over time, it is very probable that your capex will exceed cash flow. In other words you are looking at a money pit. Improvements will not reflect in higher property value. Why? Because you are in a location with negative land value.

If the area changes to the better (usually very slow), the market reacts very efficently and as soon as people like the area better and rents start going up, prices are going up as well and will quickly gravitate to about 1%.

People who tell you 2% is possible (outside of an expectional smoking deal, special circumstances), have either not experienced capex over time, or they are not telling you about it (and are lying to themselves as well) or are slumlords and will soon own a property that is uninhabitable.

Jabari Long · Answer

@Robert Collins No problem.  I’m in Atlanta once a month.  Maybe we can connect while I’m in town.

Jabari Long · Answer

@Robert Collins To achieve 2% Rent to Price ratio is very aggressive.  I’m not saying you can’t locate deals like this, however, the volatility of income is higher than say the 1.25%.  The higher returns presents another level of challenges.  I suggest exploring all your options before pulling the trigger.

Tiwana Merritt · Answer

Very helpful comments, thanks guys! I'm hoping to reach out to some of you in the GA market to start building up my network. Looking forward to the conversations. Thanks @Robert Collins!

Georgui Kasaev · Answer

You may have to adjust those numbers a little more to 1%. Athens has seen a lot of activity in the last few years. Its constantly being voted as one of the better places to retire and one of the best college towns. I think if you're looking for a rural place you'd have to go to Georgia Southern or someplace like that.

However, the rental market is strong and there is an opportunity in town but its more in the shape of building more density on lots that had their zoning density improved.

2% outside of Atlanta is it possible in 2019 ?

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