I am just trying to learn about our local rental market and good ways to do analysis. Such as does the 50% rule hold up well in the Minneapolis area? is the 1% rule a good fit for rents in this same area? And anything else that is useful in looking at deals here. Thank you all so much for your replies and if anyone would like to meet up I am in the Maple Grove area and would love to get someone coffee sometime.
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
@Max Peterson I stay way from these sorts of rules personally. I think it’s best to analyze the deals individually and then eventually will come up with shortcuts but they won’t be based on rules other people created for you. As it turns out the majority of my purchases have met the one percent rule but I never once used it in analyzing or making a decision.
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
@Max Peterson I stay way from these sorts of rules personally. I think it’s best to analyze the deals individually and then eventually will come up with shortcuts but they won’t be based on rules other people created for you. As it turns out the majority of my purchases have met the one percent rule but I never once used it in analyzing or making a decision.
Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes
8y
These rules are also subject to the market. Right now 1% rule is out there, but maybe not in the type of property you are looking for. Real estate purchasing is speculative, no one is selling a property that earns 10%+ CoC as is. Either rents can be raised, rehab, utility separation, adding bedrooms, poor management, or a number of other factors that must be determined.
You can buy a property right now and even if it is does not meet the 1% rule or 50% that doesn’t mean that it will be a fantastic property in a couple of years.
My husband says he didn’t buy Under Armour stock in 2005 and hold it for a year and sell saying it was a loser, he held on knowing it would have ups and downs as many stocks and investments do.
Some things take time. A good property may get a premium at the sale because a good investor will hold it for a long time and maybe do a little better than break even in the beginning (while paying it off with rental income). Then on the back side make a killing from rehabs, rent increases, etc.
Some properties do well as flips, some do better as 5-10 year holds and others are long term holds.
Excluding premium areas and war zones the average price in the twin cities is currently (it is changing as inventory is changing and is a very general guide) approx monthly rent times 1.1 times 100. Lots of other factors go into the estimate though.
The 1% rule is great as an instant check but you really need to run the numbers. For instance, commercial properties in the Twin Cities have much higher property taxes than residential or even commercial properties in Western Wisconsin that can ruin a pro-forma. @Tim Swierczek hit the nail on the head. You should probably get comfortable with running all the numbers on a few properties before you come up with rules of thumb. And then once you've developed your own rules of thumb, check your work by running the numbers again.
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
I also do not go by any of the "rules" and it bugs me a little when I hear people talking about the "rules". There are no rules to investing, especially if you consider they are talked about on BP at a national scale. You could find a property meeting the "2% rule" but it wouldn't matter if you are paying all utilities, it has deferred maintenance, and property taxes are through the roof.
Investing is tricky for poeple in the beginning because it is hard to figure out what a good deal is. Some people may be looking for COC return, some people may be investing for appreciation, and some people are just looking for monthly cash flow. Many people investing in MN are looking for COC return and cash flow but a good COC could be a big loser if it is over leveraged and the market tanks.
If you haven't yet I would hookup with an experienced realtor who specializes in investment proprties. They can discuss your needs and help find a property that meets them. Your mom's friend who is a realtor doesn't typically know a lot about rental properties. At the end of the day you want to learn through the process and be comfortable with your purchase.
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
8y
I love the 1% rule.....as a quick way to see if I should analyze a property. BP podcasts will tell you if you have the 1% rule you will “generally” make money. Generally. In my area alone, there are cities where the landlord pays no utilities, and one area where landlord will definitely pay water and sewage. And of course, property taxes vary greatly everywhere. But I still like the quick and dirty math to see if I should delve deeper into a property.
I think the 50% rule is a good tool for analysis, but it is a bit on the unrealistic side. I don't invest in properties that only get a 1% return. There is not enough there, there.
Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
8y
Some great comments here!
@Max Peterson When I'm evaluating I go be my trustworthy spreadsheet. If it meets the cashflow I want to achieve with the property then I consider it and would only buy it according to the numbers. I learned this from the podcast when Brandon Turner stated he mostly only invest if the property cash flows $100.
@Max Peterson When I'm evaluating I go be my trustworthy spreadsheet. If it meets the cashflow I want to achieve with the property then I consider it and would only buy it according to the numbers. I learned this from the podcast when Brandon Turner stated he mostly only invest if the property cash flows $100.
$100 is nowhere near enough for me. If rent prices drop or someone builds new construction your cash flow will be wiped out quickly.
Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
8y
@John Woodrich I agree 100%, this was just what Brandon Turner said at one time on the podcast and a webinar. I was using that as an example to say, "If property cash flows X, I'll look to invest sticking to those numbers."
Minneapolis, MN · Member since 2017 · 35 posts · 18 votes
8y
I think the key to investing in Minnesota, like anywhere is to understand your goals and make sure your investments work towards them. We have a few properties that cash flow $300-400/month but are little to no work, and a few college rentals that cash flow more ($600-800) but have more repair, turnover, etc. Also, our goal is to pay them all off in 10 years to then have significant cash flow and equity to have financial freedom. We aren't looking to obtain a ton of properties, or build monthly income fast, just safe stable purchases to build for the future. As you can see from posts, everyone has different criteria, goals, and investment strategies. Find yours and work toward it. The best advice I would give to newbies is to start with a simple, single-family rental in an OK area. Try to find a decent, fairly-priced home (there's not many amazing deals out there) and get some experience. The most important thing is to be picky about tenants. Good tenants are worth the time and effort to screen, bad tenants can make your life hell. Feel free to PM me if you want any details on what has worked best for us.
Rental Property Investor · Minneapolis, MN · Member since 2016 · 60 posts · 30 votes
8y
I agree with @Josh Collins 100%, assuming that you’re looking for a buy-and-hold that will cash flow more than a hundred bucks a month.
For the sake of time spent on analyzing deals, I'd advocate using the 1% rule (or some adjusted number...maybe it's a .8% rule for a duplex, or a .7% rule for a SFH, or vice versa, etc.). It's still a very good benchmark to see if you're in the hunt or if there isn't a chance in the world that you'll make money. If it looks good from that quick look, run the numbers in their entirety. There are always anomalies like single bill utilities on a triplex that the landlord pays that will prove the 1% rule to be useless, but generally it works for small MFH or SFH. If you have limited time to put into your search, I think this is vital in allowing you to be more efficient.
Just find something that works for you and allows you to look at a listing and quickly decide if it’s something you want to look into further. It’ll take some experience of running the full numbers on a lot of properties right away, but then you use that bank of knowledge to build your “rule.”
And a heads up- you’re unlikely to find a true 1% rule deal in many of the more desirable areas of the TC. But you’ve probably found that out already. You can get them there with value-adds, but hard to find one that will hit that threshold from day 1.
If you’re not looking for buy and hold cash flow, as Amber said, forget everything you just read from me.
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
Good advice from @Corey Robert Leet. What makes sense for one investor may not for another. It doesn't mean it is a bad investment, it may align correctly with your goals. Many new investors get cold feet and struggle to jump in. You will gain more experience jumping in than you will gain waiting for a perfect deal and reading posts.