50% and 2% rule and just bought a rental

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50% and 2% rule and just bought a rental

Brandon Redfern
Rental Property Investor 路 Greer, SC 路 Member since 2016 路 39 posts 路 30 votes

I discovered BP several weeks ago.  I had mainly been listening to the podcast and hadn't heard some of the rules that I've been reading about on the forums the last few days.  I have 4 rental properties that probably never met the 2 rules above (as long as I understand them correctly).  But I feel like they've been great long term deals (which is my goal).  I make close to $300k and do not need cash flow, just hoping to slowly build long term wealth. 

Well I just put a bid on a rental property here in Greenville and won it. $165k for a 1721 sqft SFR. It is in great shape (built 2002) and I believe I will get at least $1450 a month but hope to get $1600-$1700. The house is in a great school district and I believe the maintenance costs will be low. It's 5 min from my house so I won't use a PM company (I don't use them on any properties, I've been extremely lucky I guess). Because it's an investment property the taxes almost triple and I believe my payment with the escrow will be about $1050. I guess I've always just loved the idea of someone paying off my property long term and haven't worried too much about much else, as long as I'm in the black (but of course prefer the green and always have been) then I've been happy. Also there aren't too many single family homes like this that go for less than $200k and I believe this market is a phenomenal one, both rental and growth.

Reading on here kind of makes me question my approach so I'm just looking for feedback and pushback. 

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Brent Coombs
Investor 路 Cleveland, OH 路 Member since 2015 路 6k+ posts 路 2k+ votes
10y

@Brandon Redfern, basically, the 2%/m "rule" is for people who DO need the cash flow. There are always markets where 2%+ is achievable, but usually in areas you wouldn't want to live yourself! 

People like you on the other hand are ever worried about the dreaded T word. I'm not aware of why it would be true that for "an investment property the taxes almost triple". Is that true? I thought you just pay your marginal tax rate on any net rental profits. Am I wrong about that?

Anyway, at $300k/y, YOU can afford to buy where you like, rather than searching out for 2%/m.

Good for you. Cheers...

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  • Brent Coombs
    Investor 路 Cleveland, OH 路 Member since 2015 路 6k+ posts 路 2k+ votes
    10y

    @Brandon Redfern, basically, the 2%/m "rule" is for people who DO need the cash flow. There are always markets where 2%+ is achievable, but usually in areas you wouldn't want to live yourself! 

    People like you on the other hand are ever worried about the dreaded T word. I'm not aware of why it would be true that for "an investment property the taxes almost triple". Is that true? I thought you just pay your marginal tax rate on any net rental profits. Am I wrong about that?

    Anyway, at $300k/y, YOU can afford to buy where you like, rather than searching out for 2%/m.

    Good for you. Cheers...

    3Reply
  • Brandon Redfern
    OP
    Rental Property Investor 路 Greer, SC 路 Member since 2016 路 39 posts 路 30 votes
    10y

    The county gives a 2% adjustment if it's your primary residence. So it goes from 4 to 6%. I'm not quite sure why it almost tripled but I have another one here and that's what it does. good ole govt 馃槧

    1Reply
  • Erik HitzelbergerPro Member
    Investor 路 Louisville, KY 路 Member since 2011 路 331 posts 路 278 votes
    10y

    The only Rule-of-Thumb worth remembering is that all Rules-of-Thumb are worthless. Sort that out later. The point is that you have to invest in a manner that supports your goals. You have an extremely well-paying job and have the stated goal of long-term well accumulation. Purchasing good properties in appreciating areas supports this goal. The PITI payment leaves $400-$650 for reserves (vacancy, maintenance, repairs) and PM if desired. This should be sufficient. Your tenants will eventually pay off the note and you will have a very nice income stream. Under most conditions, you will also have a very nice asset.

    Purchasing a series of $40K properties that generate $800 per month with limited to no appreciation does not really support the goal.  Additionally, the management effort will be higher.

    The only pushback I have is to reconsider your Prop Mgmt strategy.  Yes, you can manage the home, but isn't your time worth more than that?  Do you really want to deal with tenants on the weekends or while you are on vacation?  Does your job allow you to take time and deal with maintenance issues or showing vacant houses?  Let someone else take care of it and spend your efforts looking for other deals or enjoying your free-time. 

    Congratulations on your purchase and good-luck!

    3Reply
  • Kathy Stewart
    Rental Property Investor 路 Dallas, TX 路 Member since 2015 路 243 posts 路 70 votes
    10y
    If you are accepting of and able to achieve positive cash flow after mortgage, taxes and all expenses, then whatever that percent is becomes the percent rule that works for you.
    2Reply
  • Cole Swartz
    Beloit, WI 路 Member since 2015 路 56 posts 路 16 votes
    10y

    I agree with Erik with regards to possibly reconsidering your Property Management approach. As he says, you have to determine how much you value your own time.

    1Reply
  • Mike Dymski
    Investor 路 Greenville, SC 路 Member since 2016 路 5k+ posts 路 13k+ votes
    10y

    appreciation is part of the equation 

    2Reply
  • Brent Coombs
    Investor 路 Cleveland, OH 路 Member since 2015 路 6k+ posts 路 2k+ votes
    10y
    Originally posted by @Brandon Redfern:

    The county gives a 2% adjustment if it's your primary residence. So it goes from 4 to 6%. I'm not quite sure why it almost tripled but I have another one here and that's what it does. good ole govt 馃槧

    So, you mean that (investment) property taxes are 50% more than for your primary (ie. not triple)?

    That shouldn't be a problem, because it's a known expense. As for nice neighborhoods and great school districts - they are fairly much by definition excluded from 2%/m returns. But so what?

    YOUR equation has obviously already focused on equity/appreciation INSTEAD of cash flow.

    There are plenty of people, who don't NEED bigger pockets, who do exactly the same! Cheers...

    3Reply
  • Brandon Redfern
    OP
    Rental Property Investor 路 Greer, SC 路 Member since 2016 路 39 posts 路 30 votes
    10y

    @Erik Hitzelberger I have been the luckiest rental owner in the US and my appreciation for that luck has only been enhanced by reading on here.  My first property is a home that has had the same renters for 5 years. He's a contractor, I have never raised rent and they don't ask me to pay for anything and take immaculate care of the property.  My second, they have been there over 3 years and very similar, I don't raise rents and they take care of it as their own.  My third is 4 min away and they have turned the yard into the best yard in the neighborhood and are hands off. My 4th is a unit on my property and they are Mormon missionaries and are never there and are expected to keep it immaculate.  Honestly in 5 years I have spent no more than a few hours a year handling anything.

    The one thing that I learned from an investor early on and has paid dividends is being patient in finding good people and treat them amazingly.  Like I said I've never raised rent BUT all of them pay late and I collect $100 extra when they do and it's almost every month.  But I do not hassle them (once again I am VERY lucky to have a job where I am not desperate for the rent payment).  So as a result they think I'm the greatest landlord ever because they can take care of other things first.  I will send a text or two a month and usually act more annoyed than I really am but only because I don't want them getting TOO comfortable.  But so far it has worked.

    Now I realize that it's mostly luck and that one day I will have to find a PM company but with the time investment of almost nothing and the saved money it has worked out so far.  I'll ride it till it get's too much. 

    All that said I appreciate the advice and think about that all the time.  I know the gravy train is running out.

    0Reply
  • Brandon Redfern
    OP
    Rental Property Investor 路 Greer, SC 路 Member since 2016 路 39 posts 路 30 votes
    10y

    @Brent Coombs I wish I knew how it was calculated better.  But its really not just a 2% difference.  For example the first home I bought here I was living in it first then bought another property and moved in.  The first year property tax was $1734.  The next year ... $4719!!! So yeah more than doubles.  On the statement it calculates using taxable market value, then assessed value, then millage?  I know I should understand this better but almost everyone I've talked to in Greenville county say that it almost triples for investors and that's what happened to me and I'm sure will happen on this next one.

    0Reply
  • Brandon Redfern
    OP
    Rental Property Investor 路 Greer, SC 路 Member since 2016 路 39 posts 路 30 votes
    10y

    By the way thanks for the other responses as well.  It's nice to see that the rules don't always apply.  I see the value of going after lower income properties because of the price but as of RIGHT NOW I'm focusing on middle income properties with less maintenance.  So it's nice to hear I'm not totally off my rocker.  But I want to keep learning and because of my job flexibility, income, reserves and passion for real estate I want to keep getting better at this and have gone from wanting 10 units to 50+ ... with a property manager of course :)

    0Reply
  • Ben W.
    Investor 路 Cincinnati, OH 路 Member since 2014 路 97 posts 路 27 votes
    10y

    @Brandon Redfern, GREAT job getting to where you are now. I am also in the same job/income bracket and decided that Real Estate was where I could generate a much higher return, even when factoring in the time I spend. I have been investing for over 20 years. My strategy has been more on the lower end of the market as we focus on "distressed situtations" (other investors, banks, auctions, etc). What I have been able to do, as you probably have, is to leverage my ability to get financing or create low money down deals (seller financing) and leverage this into a very high ROI operation. What the Rule of Thumb does not factor in is the ROI (if you can generate a return that is double digit, then you are way ahead. Even in our no- money down deals, we have no problem internally financing the improvements because of the leveragability we have on the front end (100% financing for a very low purchase price; then we fund the improvements and DO NOT seek to refinance or cash out). I now use a property management firm for my 40 unit portfolio 100 miles away (great decision on my part, but took a long time and much trial and error to get there). However, we manage our 125 unit residential and small commercial portfolio in our home market ourselves. By "we" I mean a team that I have had to put in place. I found a very professional contractor (former corporate guy who gets it) to act as my Chief Operations Officer and assist with coordination of the maintenance and turnovers. Because we are buying lower end and the tenant base can be more transient, we have more issues. But, I run a tight ship using a great management software system (AppFolio) that provides me and the COO a dashboard. I have found that no one manages or cares as much as you, not even my COO. So, as you grow, find out where you need to outsource and ask for input from others.

    Again, congrats on getting to this point. Do what you like doing and what is working. Do try to reach slightly outside your comfort zone from time to time if your are wired that way - there are so many things to explore in the REI world. I wish I had started when I was 10.

    Ben

    2Reply
  • Brandon Redfern
    OP
    Rental Property Investor 路 Greer, SC 路 Member since 2016 路 39 posts 路 30 votes
    10y

    @Ben W. Love it! This is why I'm here. I'm not afraid of risk or reaching out of my comfort zone.  I happen to LOVE my job and hope to do it for a long time BUT I want to (at least) match my income in the next 10-15 years in case the govt keeps trying to put it's hands in the insurance and financial services industry (this latest DOL rule is an atrocity but I digress).  So I WANT to step out but since I have the means I don't feel like it's now or never, so I'm trying to be somewhat smart in the beginning and not make TOO many mistakes.  I love Robert Kiyosaki's quote "most people never win because they are more afraid of losing". I'm 34 and I like my timeline but I do hope to be a little more aggressive moving forward.  Right now I'm looking at a lower end property that would require quite a bit of fixing up.  But I hope to be able to find and connect with people (like you) that have done it or are doing it.  And I think I'm in a GREAT market to set myself up for great success.

    0Reply
  • Ben W.
    Investor 路 Cincinnati, OH 路 Member since 2014 路 97 posts 路 27 votes
    10y

    keep going.  Keep the positive attitude.  Not everyone is wired the way you are.

    1Reply
  • Quinn Hamilton
    Greenville, SC 路 Member since 2016 路 6 posts 路 5 votes
    10y

    @Brandon Redfern Hi, I'm impressed with your portfolio as I am a newbie...read: very green and just starting to gain knowledge about all the different REI options. I want to eventually have a few rental properties for cash flow. Right now, my husband is terrified of the responsibilities of having tenants. I'm not, because I'm a good manager and keep things "business,"not emotion-driven. I was wondering do you use your contractor tenant for any (contracting) jobs? Also, do you get your deals on or off MLS? And how have you find your tenants?

    0Reply
  • Brandon Redfern
    OP
    Rental Property Investor 路 Greer, SC 路 Member since 2016 路 39 posts 路 30 votes
    10y

    @Quinn Hamilton 

    Thanks! No he hasn't done any work for me yet. I have 2 contractors that I'm comfortable with. So far I've just used the MLS. I'm sure there are better ways out there but I haven't been able to find any yet. BUT I see you're in Greenville and there are deals here on the MLS. This market is growing but I've found some strange nuances here that not everyone sees. But I think the best thing about this market is the rental market and opportunity.

    0Reply
  • Cheryl Campbell
    Investor 路 Boca Raton, FL 路 Member since 2016 路 6 posts 路 2 votes
    10y

    Your property tax went up, no doubt, because the new assessed value was based on your new sales price (the price you paid to buy it). In SC, the assessed rate is 4% of the appraised value (or the latest sale price) for primary homes, and 6% for others. The raise in taxes is due to the increase in its appraised value, over its previous appraised value, I'm pretty sure.  If you paid twice what the previously appraised value was - lets assume it had not been reappraised for a while and had a low rate, and then jumped from the 4 into the 6 percent tax bracket  (a 50% jump), then you'd have a new assessed value for taxes to be levied upon. You should also see if the millage rate went up as well.   (I have family interests in SC, was born and raised there.... went to Clemson)

    2Reply
  • Ron T.
    Investor 路 Sharon, SC 路 Member since 2014 路 77 posts 路 40 votes
    10y

    Cheryl,

    It's not quite that simple. Several counties, including Greenville, also have different millage rates for owner occupied versus non O/O properties. So the 3x is very possible in Greenville, York, Lancaster, and Pickens counties (among others) 

    2Reply
  • Ron T.
    Investor 路 Sharon, SC 路 Member since 2014 路 77 posts 路 40 votes
    10y

    To expand here is a link to the York Couny explanation:

    https://www.yorkcountygov.com/_fileUploads/forms/H...

    The example given really illustrates it.

    $100K (owner occupied)

    4% and  .2142 = $857/yr 

    $100k (n-o/o)

    6% AND .3916 = $2,350/yr

    Almost exactly 3x.

    Again varies by county but many counties now have a different millage table

    2Reply
  • Cheryl Campbell
    Investor 路 Boca Raton, FL 路 Member since 2016 路 6 posts 路 2 votes
    10y

    Thank you, Ron. Poor owners in those counties with varying millage! I'm sure I'd be a bit gobsmacked by the jump, too.

    0Reply
  • Brandon Redfern
    OP
    Rental Property Investor 路 Greer, SC 路 Member since 2016 路 39 posts 路 30 votes
    10y

    Yep that looks about right @Ron T.  Thanks for sharing that, though I wish it weren't true.  Well I guess it can be a good thing.  I have a friend that is looking for a house to rent and can't find a dang thing!  These taxes are pricing out some potential investors, which I guess helps those of us that are in it to be able to get things rented quickly.  I just put up a property we are about to close on and have been getting calls all day!

    0Reply
  • Mike Dymski
    Investor 路 Greenville, SC 路 Member since 2016 路 5k+ posts 路 13k+ votes
    10y

    Taxes on primary residences are low in SC; so, the investment property taxes are essentially a subsidy for that.  It's the buckle of the bible belt too...promotion of home ownership.

    Note to sellers of investment properties in SC...the attorney is going to prorate taxes at closing based on prior year taxes.  If those taxes are at the investment rate and you are selling to an owner occupant, make sure you have the buyer sign an addendum at closing that the they will settle up the true taxes with you when they are paid at year end (at the owner occupant rate).  Or get the attorney and buyer to prorate using the owner occupant rate at closing, if you can.

    3Reply
  • Juan Medina
    Simpsonville, SC 路 Member since 2014 路 9 posts 路 2 votes
    10y

    Have you look into getting a property in Spartanburg? Prices there seem so much better; I haven't been able to find anything in Greenville either. 

    I am looking for my first investment property. I am ready to purchase something right now. 

    0Reply
  • Marna N.
    Investor 路 Greenville, SC 路 Member since 2011 路 22 posts 路 5 votes
    9y

    Brandon, would you mind sharing your contractor(s) names? We are getting ready to start a flip and the guy we had lined up has backed out because of something that came up at his work.  You can PM me names, if you're more comfortable than putting it public.

    Congrats on your success thus far! We are doing both flips & rentals. If you ever want to network, let me know too. We are part of a local meetup as well as members of Upstate Creia.

    Thanks so much!

    Marna

    0Reply
  • Mike Dymski
    Investor 路 Greenville, SC 路 Member since 2016 路 5k+ posts 路 13k+ votes
    9y

    Hey Brandon, I hope all is well.  This is a stale post but another SC investor and I were discussing a Greer property last night; so, this old post come up.

    Another item pertinent to your original post is liking to do business with your residents and also understanding their needs.  The more you relate to and understand their needs, the better your real estate business will be able to support those needs.  The more you relate to and like your residents, the more you will enjoy your partnership with them.  If you can't relate to, don't like, don't agree with or don't enjoy interacting with your economic class of residents and you are a part-time investor and self-manage, that can be an unpleasant experience.  It's a big cost that won't show up on most spreadsheet and it may not be worth it compared to other investment opportunities or a day job.  Lot's of successful strategies and it's not one size fits all.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    9y

    Mike another point that I think should be clarified with regard to 2% and 50%.

    50% for expenses for napkin work is great  and will pretty much always be relevant up to a certain rental amount... high rents like 2500 to 4000 like we are seeing her on the west coast 50% is a little high to a lot high... 30% might be a better number at that point.

    2% was a window in time... that has closed for 90% of the US rental stock... And I think right now it can harm folks who think that 2% is what is needed to or what they should do.. it leads them to the war zones and hood properties  were 2% is still viable.. At least as it relates to investors from high priced markets looking out in the mid west rust belt ETC.

    the number these days for sustainable rental homes in my mind is 0.07  to 1.25  that gets you in the sweet spot of a tenant class that you can be successful with.

    Caveat  there are always little mid western or mountain towns or coal towns in Pa and other areas were there is 2% that are not quite as dangerous but those are the provenance of locals not something most out of state investors could find and or own or manage..

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