2% Rule in California?

14 Replies

As I begin to analyze properties - small, multifamily - in the LA area, none seem to be "passing" the 2% rule.

A guy in my real estate investing program (which I now regret investing in) moved out of California to begin investing in Texas because he "couldn't find any profitable deals" here. I definitely don't want to leave LA.

How do experienced investors in California proceed when rents well exceed 2% of the purchase price of properties here?

Any advise or feedback would be gratefully appreciated.

In advance, thank you!

B

Originally posted by @Bobbi Martinez :

...How do experienced investors in California proceed when rents well exceed 2% of the purchase price of properties here?...

What you meant to say is: "How do experienced investors in California proceed when rents never come anywhere close to 2% of the purchase price of properties here?"

Yep. That's the question. Good luck.

were you can find 2% and live to tell about it is in some of the small towns in the mid west. There is no crime or real danger like inner city stuff.. but the tenants are basically very low income.. so they cant afford much rent.. but you can buy homes for about 20 to 30k in those towns that will rent for 500 to 600 ... but they will never go up in value basically and if you choose poorly your capex will kill any profit.

Do you have a burning desire to be a landlord... or is that just something you think you want or need to do.. there are many other avenues to make money in RE without dealing with tenants and taking on those risks.. not many people get rich owning a few rentals unless they are prime CA NY CHC  type assets.  were 2 or 3 homes are worth millions

I think 2% is extremely difficult.  I'd rather go for covering costs and waiting for appreciation.  In the Bay Area, it is all about the appreciation.

Originally posted by @Bobbi Martinez :

As I begin to analyze properties - small, multifamily - in the LA area, none seem to be "passing" the 2% rule.

A guy in my real estate investing program (which I now regret investing in) moved out of California to begin investing in Texas because he "couldn't find any profitable deals" here. I definitely don't want to leave LA.

How do experienced investors in California proceed when rents well exceed 2% of the purchase price of properties here?

Any advise or feedback would be gratefully appreciated.

In advance, thank you!

B

Oh man, that 30k investment you paid them could buy you 2 houses in Kansas. Cash flow around 500-800/month.

Thanks everyone...I truly appreciate your input.  It's not so much that I want to be a landlord, so much as my ideal has been to purchase small multi-family properties.  I think I'm going to look in Arizona.  It's my home state and only an hour away.  My entire family is there so I may be able to get help by way of more eyes in the area.  

That said, I don't want to totally give up on LA.  Just want to be as cautious as possible.  A couple of you mentioned my considering alternatives investments.  Could you be referring to flipping and wholesaling...and such?

B

If you want to stay in CA, invest in RE, and NOT invest remotely out of state, then you will need to adapt your strategies to this market. That means forget about 2%, probably would need a small miracle to pull 1% and in the nicer neighborhoods you can't even cashflow with less than 50% down. This doesn't mean you can't still make money in this market, it just means you'll need to either change up your tactics (value add house hacking, flipping, RE services, etc) and/or wait until the market turns (always does, and usually dramatically in CA) to get cashflow. BTW, even in the depths of the great recession I was only able to pull ~1.25% on SFRs in C-class hoods (Palmdale, Lancaster), but they cashflowed and their values have since doubled ... so profitable buy-n-hold is possible in CA, just probably not at this point in the cycle. You need to be cognizant of the market cycles, adapt accordingly, and always protect your downside with a viable plan B. BTW2, I generally advise NOT investing out of state ... been there, done that, and it was very painful for me; your mileage may vary.

@Bobbi Martinez It's not going to be possible to find 2% in the LA basin, but if you go to the outlying areas in the desert it is possible. I bought a duplex last November for $64k that rents for $1,350 per month. If you add closing costs plus improvements that I made the all-in cost was $72k. The key is to figure out a way to find properties that nobody else is looking at. In my case, I spent many, many hours searching the MLS all over California, narrowed it down to a sub-market that I thought had potential, and scoured the market for deals until I found one. Other people find off market deals by purchasing marketing lists or scouring the county records. Another route that I have thought about but haven't really pursued yet is through probate court. Lots of people that receive inheritances are impatient and might be willing to make a deal to get their cash sooner.

You might want to go to your local REIA meetup and find out what strategies are working for local investors. I think psychologically that helped me realize this was possible and not some pipe dream when I was just starting out.

@David Faulkner  What happened with your out of state venture?  Was it T-key or did you build your own team?  I'm 100% in California at this point, but thinking of building a team in the Midwest.  I would like to hear your perspective.

"rents never come anywhere close to 2% of the purchase price"

That's a BAD metric (guideline). You're interested in the NOI and ROI. Now it's true that SFR units in pricey markets are difficult - - that's why you need 1-4 MFU.

Learn these terms {GSI, GRM, NOI, Cap rate & Cash-on-Cash} and how to calculate them for yourself - - you can do this over a cup of coffee

Hey Bobbi! Well, you figured out the issue CA quicker than a lot :) I had the exact same question when I first started looking around for rental properties. I didn't know exactly how to run numbers, or how to know if I was going to profit, but I couldn't quite figure out where the profit would come from. I of course later on learned all the details about it, and sure enough, I wasn't imagining things.

Honestly, you'll be lucky to even hit the 1% rule here. I'd be impressed if whatever rule you hit is positive and not negative (but agreed with the thought that at that point you'd probably be investing in the ghetto).

The 2% rule, generally, is kind of a gonner these days, no matter where you are looking. 1% is easily obtainable in various markets, but you'll have to buy out of CA. It's totally doable though....I live in LA and have only invested out-of-state, for the exact reason you are mentioning.

Wow I just read the additional comments!  Just want to say a heart-felt thank you to each one of you.   I can't believe how giving you are to share your time, experience, and wisdom.  

Looks like entering real estate investing won't be as easy as I'd hoped.  But it's also not impossible.  

Again thank you!!!! 

B