Rental Property Investor · Fresno, CA · Member since 2017 · 109 posts · 48 votes
I bought my two investment properties about 8 years ago and at that time hadn’t heard of Th e 2% rule. When I recently learned of it, I went and did the math. Each of my properties falls between 1.3 and 1.6%. I’m wondering what seasoned rental property investors aim for when it comes to the 2% rule. Do you look for 2% or better? 1.5% or greater? Between 1 and 1.5%?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
6y
Some of these posts are comical. For CA, anything in the 1.5% range is a heck of a cash flow deal and not easy to find, more often, created. People need to realize that the 2% rule, 1% rule, etc are not Rules at all, merely guidelines meant as a quick back of the napkin analysis. Your purchase decision needs to be made on a full due diligence of the numbers, the property, the market condition,s your goals, strategy, etc, etc. . . .
Any property in this country meeting a 2% rule at purchase is going to be a lower end property likely in a c- or worse area and likely not offer much in the way of appreciation. Ultimately you need to decide for yourself what kind of landlord and investor you want to be. Buying properties for $10k in some states in low end, high crime areas will require some heavy managerial responsibilities and difficulties, legal issues on evictions, etc. These properties may cash flow much larger on a % basis but only you can decide if the risk, time and headaches involved in that asset are worth it for you and your goals.
1% in many areas of different states will equate to break even or even cash negative whereas in some places, may provide small cash flows. In Los Angeles, a single family 3+2 1500 SF standard home built in the 50's is going to run you at least $300k+ (and many areas it will be $500k+) in most areas and is likely not going to bring you $3k+ in rent. The desert cities like Bakersfield and Fresno, parts of the Antelope Valley, etc can find deals in the 1.5% range but they are typically homes that are purchased for sub $200k and not in appreciating areas or in good neighborhoods.
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
6y
It's all market dependent and also varies significantly by class of property. Most on here will not require a property to pass the 2% rule because if they did, they'd never make a purchase. In 2011 and a few short years after, this was a pretty doable thing as properties were still undervalued. Most of that has corrected itself so in most markets 1% is more realistic. I'm closing on a property June 6th and it's about 1.25% but it's rented under market at present. It's a C class property.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
6y
@Nathan Shankles you have some good mentions above. Most Single Family properties will NOT hit the 2% mark. If you buy a property for $200,000, to rent it for $4,000 would be pretty great. In most markets 1%-1.5% is a pretty reasonable rate of return. That will allow you to cash flow very well. Using the $200,000 value above, renting at 2% would mean you would be cashflowing over $1,000 per month. 2-4 unit properties usually rent at a higher percentage than a single family home. Anyway, hope this helps in some way. Thanks!
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
I own B class properties. If tenants pay for all their own utilities, mine are about 1%. If I need to pay for utilities I look for at least 1.3% to 1.5%. Any properties that I've found that are 2% are better are C to D class, and I don't want the headache. They end up being 0% if the tenants do not pay the rent every month.
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
6y
One thing about the 2% rule is, 2% of what? The actual purchase price? The ARV? The total investment into the property (purchase plus repairs) or?
Since we buy fixers and do a lot of value add providing ALL the labor, how we calculate the % could vary a lot. I do find that real estate rules of thumb are very useful in quickly assessing a property. It can certainly rule one out quickly.
On average we've found we spend about $10,000 in materials to fix up a property to rental standards. (and it usually takes us about 4 to 6 months of effort) Thus we may turn a property that cost $60,000 into one that's worth $85,000 and have $70,000 into it. That's not flipping margins by any means but for long term buy/hold it works for us. So maybe that property rents for $850. Depending on which number is used, it's either 1%, 1.2% or 1.4%. Any of those numbers will cash flow for us because our properties aren't leveraged.
Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
6y
I don't worry about meeting any kind of rule. As long as the property cash flows at least 250 per month minimum that's what I am for anyway. If you wait around waiting for something to meet that certain percent rule you will miss out on a ton of deals or never get started in real estate. I find that over time with the property cash flowing, principal slowly being paid down and the property appreciating in value that is good enough for me to keep it.
Rental Property Investor · Lumberton, TX · Member since 2017 · 54 posts · 62 votes
6y
I use the 1.5% rule as a base line but that's purely based on my area. In my area if you can cash flow $350/month and be all in under $100k I think it's a good deal. The times I have gotten deals at 2% usually are foreclosures etc which aren't common and natural deals. I have gotten a 3% deal once but it required me buying a foreclosure on the courthouse steps and then getting lucky on the rehab and then lucky again finding a tenant in housing with the highest voucher I have ever scene in my area.
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
6y
@Dennis M. do you usually buy fixers and upgrade them or are yours typically occupied or "able to be" occupied when you acquire them? And, based on that, what do you base your 3% or 4% on, purchase price or after repair?
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
6y
If I pay 10k for a house I better be able to get 600$ a month on it . And that’s with a rehab less than 2k total . I would pay 15k a door if it were nice but it needs to produce cashflow right away . Ideally when I buy I like them to be able to pay for themselves within 2 years in order for me to justify the purchase
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
6y
I can find a $10k house around here but $2k isn't going to make it rentable. I know where there's one I can probably buy for less than $3k but I wouldn't rent it to someone. (even though someone is currently living in it). It's a scrape in my opinion.
Investor · North Central Montana · Member since 2018 · 40 posts · 17 votes
6y
The last two deals we did are. Purchase price 74,500 rent 1,200. We did rehab it for 25,000 ish. So not sure how you calculate that 1200/99,500= 1.2. Some may say that is a bad deal, but we BRRRR'd all our money back out so I am happy. This next one is move in ready under contract for 45,000 rent for 700. 700/45,000= 1.55 this one is move in ready. I think a "good deal" is somewhat relative. If you are playing the long game a lower percentage may work good for you. I am happy with both my deals even though they are very different from each other.
Investor · North Central Montana · Member since 2018 · 40 posts · 17 votes
6y
@Nathan Shankles I am in Montana and have properties in a couple of towns in North Central Montana. 2 in a small town called Choteau where I live along the beautiful Rocky Mountain Front and 2 in Great Falls the closest decent sized "city".
Rental Property Investor · Grande Prairie · Member since 2019 · 18 posts · 4 votes
6y
@Brent Paul I understand what your saying cash flow is also my number one factor but I think the 1% rule is a good one to look at also because no one would purchase a million dollar home to cash flow $250 a month. That invested money even if 100% leveraged could be used to do multiple deals that cash flow much better.
Rental Property Investor · Cambridge Ohio · Member since 2019 · 34 posts · 8 votes
6y
@Nathan Shankles
I don’t do a spec under 3.3% and it works awesome. 5 properties with 8 rental units and my families core budget is paid for with a minimum of 4 units rented. All for under $150k total
Rental Property Investor · Cambridge Ohio · Member since 2019 · 34 posts · 8 votes
6y
@John Teachout
My first rental I purchased for $15,000, put $10,000 into it, did the work myself, materials was the only cost, and the current fair market rent value would’ve been about $800/month (3.2% of $25,000) But the house came out so good I moved into it because it was beautiful and centrally located. My plan is to be out of it in 12 months
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
6y
Some of these posts are comical. For CA, anything in the 1.5% range is a heck of a cash flow deal and not easy to find, more often, created. People need to realize that the 2% rule, 1% rule, etc are not Rules at all, merely guidelines meant as a quick back of the napkin analysis. Your purchase decision needs to be made on a full due diligence of the numbers, the property, the market condition,s your goals, strategy, etc, etc. . . .
Any property in this country meeting a 2% rule at purchase is going to be a lower end property likely in a c- or worse area and likely not offer much in the way of appreciation. Ultimately you need to decide for yourself what kind of landlord and investor you want to be. Buying properties for $10k in some states in low end, high crime areas will require some heavy managerial responsibilities and difficulties, legal issues on evictions, etc. These properties may cash flow much larger on a % basis but only you can decide if the risk, time and headaches involved in that asset are worth it for you and your goals.
1% in many areas of different states will equate to break even or even cash negative whereas in some places, may provide small cash flows. In Los Angeles, a single family 3+2 1500 SF standard home built in the 50's is going to run you at least $300k+ (and many areas it will be $500k+) in most areas and is likely not going to bring you $3k+ in rent. The desert cities like Bakersfield and Fresno, parts of the Antelope Valley, etc can find deals in the 1.5% range but they are typically homes that are purchased for sub $200k and not in appreciating areas or in good neighborhoods.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
6y
@Nathan Shankles If your properties are in a good area those are great ratios. My properties ranged from .5%-1.5% on purchase. Maybe not awesome in some people’s minds but they have performed very well and in fact the one that has performed the best overall has been the one that was barely breaking even when I bought it. Why? It’s in a great neighborhood that is in high demand= great tenants and zero vacancy, rent increases of 16%/year with no complaints or turnovers, the rent is high enough that even though the ratio is low the actual dollar amount of profit is plenty to cover unexpected cap ex and maintenance issues, principle pay-down is significant, and best of all while positive cash flow is currently “only” $350/unit/month (achieved through rent increases), appreciation has been equal to $350 PER DAY which has allowed me to refinance and cash out my initial investment plus well over six figures. My C class properties had more initial cash flow on paper but in reality they have more tenant and maintenance issues that eats into profits and have appreciated a lot less and so they have performed much worse overall with everything factored in. Plus they are much less pleasant to own which has become a bigger factor for me as I’ve scaled up both my business and my family. Looking back at the numbers of how my high cap rate vs. low cap rate properties have performed over time as well as the headache factor has converted me to a low cap rate, highest overall quality property in the best location I can afford investor.
I don’t do a spec under 3.3% and it works awesome. 5 properties with 8 rental units and my families core budget is paid for with a minimum of 4 units rented. All for under $150k total
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
6y
I have a hard time understanding why properties on the west coast are so expensive. ie, a 1500 sq foot home going for $300,000 or more. Around here, you could build two 1500 sq ft homes from the ground up for $300,000. Are the costs of construction really high in Cali? Or what? What drives those high prices?