Question on 2% rule of thumb mentioned in podcasts.

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Question on 2% rule of thumb mentioned in podcasts.

Red Peterson
Sycamore, IL 路 Member since 2016 路 48 posts 路 14 votes
Heard it more than once in podcasts that a good rule of thumb is getting a property rented out for 2% of the purchase price. Question: which market is this applicable? Is this only on certain states and expensive properties? Has anyone been able to get like $2k rent from a 100k property or something similar in this price range? Thank you in advance for all inputs.馃槉
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John Lee
Santa Ana, CA 路 Member since 2016 路 39 posts 路 54 votes
10y

Being in Southern California, there is almost no chance you will come close to the 2% rule, especially for a SFH. This rule is far more likely to be achieved on a $30k house (requires only $600/month rent). There are a lot of places in the US that have houses like this, but many are in C or D neighborhoods. A lot of out-of-state turnkey companies get close to this 2% rule, but the risks are higher (vacancies, unexpected repairs/damages, evictions).

I've seen it often stated as the 1% rule in many areas, especially in better neighborhoods. However, in SoCal, you still only achieve that 1% rule in multi-families, not in a SFR.

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  • John Lee
    Santa Ana, CA 路 Member since 2016 路 39 posts 路 54 votes
    10y

    Being in Southern California, there is almost no chance you will come close to the 2% rule, especially for a SFH. This rule is far more likely to be achieved on a $30k house (requires only $600/month rent). There are a lot of places in the US that have houses like this, but many are in C or D neighborhoods. A lot of out-of-state turnkey companies get close to this 2% rule, but the risks are higher (vacancies, unexpected repairs/damages, evictions).

    I've seen it often stated as the 1% rule in many areas, especially in better neighborhoods. However, in SoCal, you still only achieve that 1% rule in multi-families, not in a SFR.

    3Reply
  • James Syed
    Real Estate Broker 路 Mount Olive, IL 路 Member since 2013 路 1k+ posts 路 310 votes
    10y

    Welcome to BP.

    @Red Peterson

    Many markets in especially in Midwest offer 2% rule accommodating properties. Many are in very small towns, but they are not war zones or ghetto areas.

    Hope it helps.

    2Reply
  • Drew Wie
    Real Estate Agent 路 Irvine, CA 路 Member since 2016 路 33 posts 路 4 votes
    10y
    No kidding on the SoCal (and other crazy markets), it's more like 0.5%...
    0Reply
  • Red Peterson
    OP
    Sycamore, IL 路 Member since 2016 路 48 posts 路 14 votes
    10y

    @John Lee; thank you. I like how you broke your response down and you mentioned specific state and numbers. Very helpful!馃槉

    BP- I think, realistically, if 2% rental (based on property purchase) is a challenge to achieve, mentioning it in podcasts (show 11) as rule of thumb may confuse someone new like myself.  It maybe better to mention that "in States or Cities such X or situation X,Y,Z, a good rule of thumb is achieving the 2% ratio". And then perhaps add whats really happening, which is 0.5-1%. I think stating the 2% ratio as an ideal goal is more suited than stating it as a rule of thumb. 

    @James Syed--hey! Thank you. Have you seen this exist in IL? Or WI, IN, OH? Just curious which states in the midwest that you know of, this is achievable and what price range will work. I am from a small town; even close to a University but even the surrounding Northen Illinois University (NIU) properties do not usually get up to 2%. 

    0Reply
  • Nate ShieldsPro Member
    Lender 路 Fort Collins, CO 路 Member since 2015 路 304 posts 路 148 votes
    10y

    Welcome to BP @Red Peterson! I see you're also in Sycamore. 

    It definitely varies by area. For most of the SFR deals I've analyzed locally, 1.5% is a good rule of thumb for a deal, but again, it depends on the neighborhood and type of property.

    My partner and I recently purchased an auction property near the high school and will be getting about 1.5% and we're very happy with that. If you want to walk the property to see what we're doing with the rehab, just let me know!

    [email protected]970-690-0644
    0Reply
  • James Wise
    Real Estate Broker 路 Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH 路 Member since 2013 路 30k+ posts 路 20k+ votes
    10y

    2% was readily available in the Midwest during the foreclosure crisis. The market has since bounced back and that number is only achievable in bad neighorhoods. When in a bad neighborhood any type of number estimate can vary widely from actual cost. Actual cost will also vary widely from year to year, tenant to tenant and even month to month.

    I am based on Cleveland, Ohio which is one of the lower cost markets that many were buying property using the 2% rule. At this point in the market the closest we come to that number is around $1,200-$1,300 in rent for $75,000-$85,000.

    2Reply
  • Randall Williams
    Investor 路 Bath, ME 路 Member since 2016 路 40 posts 路 6 votes
    10y
    I'm getting 2% here in midcoast Maine for my first duplex, though it's hard to find more that cashflow like that in good areas. Single family won't do it here. East Texas is supposed to be doing well for this now.
    0Reply
  • James Syed
    Real Estate Broker 路 Mount Olive, IL 路 Member since 2013 路 1k+ posts 路 310 votes
    10y

    @Red Peterson

    You can achieve 2% in Central and Southern Illinois. I have! I bought and sold 10 properties since May 2012.

    That is 4 years in total, not so bad. In addition, Milwaukee, WI is another town you can achieve your goal. Check with @Dawn Anastasi. She Ian excellent source of info, very intellegent person and very successful. In fact, she has even got 3% in some cases, yes! I am not kidding. 

    Hope it helps! 

    2Reply
  • Red Peterson
    OP
    Sycamore, IL 路 Member since 2016 路 48 posts 路 14 votes
    10y

    @Nate Shields-glad to find you here! Thank you for offering to check out the property you are working on. And yes I am very interested. Congratulations btw for getting the place. That area is a decent location so I'm hoping you get good markets.馃槉 I'm looking to get to know people like you with experience and expertise locally, so I appreciate such a welcoming gesture.

    @James Wise - very good point. I always thought its good to have a date of the YT video for point of reference or mention the date right after saying the podcast #. But, for a moment I forgot to consider that time frame so thank you for reminding me.馃槉 I like that you mentioned specifics bec thats what I was looking for. I appreciate your input-very helpful. Same goes to Randall Williams thanks for citing specifics.

    @ James Syed-- lol sorry if I came across doubting your input. I really wanted specifics so thank you for providing such. You did amazing in a short time! Congrats! And thanks for directing me to a reliable source of information. 馃槉 

    0Reply
  • Zarak Sharwani
    Wholesaler 路 Brookfield, WI 路 Member since 2014 路 76 posts 路 28 votes
    10y

    @James Syed is dead on.  midwest is ideal for 2% rule - rental market is strong here.  & these are not ghettos!  However, you just have to be good at finding these deals & speak with a realtor/wholesalers who understands your criteria as an investor.  

    I have noticed that many investors from California & New York are considering Milwaukee due to low barrier of entry but i personally don't recommend it to a beginner due to the fact that many risk factors have to be mitigated.

    2Reply
  • James Syed
    Real Estate Broker 路 Mount Olive, IL 路 Member since 2013 路 1k+ posts 路 310 votes
    10y

    @Zarak Sharwani

    Great use of words there Zarak!

    And yes, as a beginner, you don't want to go long distance. 

    Keep investing!

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    10y

    those are old pod casts and the 2% rule which can be great for cash flow if you can scale to a lot of them,, but it kills appreciation which is were people make their fortunes generally.. unless again you can scale and get to 50 to 100 2% SFR's then its a business its not an investment and you WILL work for your money

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Zarak Sharwani
    Wholesaler 路 Brookfield, WI 路 Member since 2014 路 76 posts 路 28 votes
    10y

    valid point @Jay Hinrichs. Some investors simply prefer the idea of an appreciating asset against rising inflation & others will take cashflow.  different strategies.  love your website! 

    0Reply
  • Dawn AnastasiPro Member
    Rental Property Investor 路 Milwaukee, WI 路 Member since 2013 路 6k+ posts 路 4k+ votes
    10y

    "2%" properties are not all "warzone". That's where I make my money. They can still be had today by the savvy investor. I just bought, in 2016, a SFH, for $25,900, put in $8,000 (?) of work, and rented for $800/mo. And I could potentially get more rent than that, but I had someone approved before the work was even done so I can't beat that.

    Podcast Guest on Show #29
    2Reply
  • Account Closed
    Bakersfield, CA 路 Member since 2016 路 49 posts 路 3 votes
    10y

    Im from central cali, and its hard to come up with those mores also. And the housing industry is as expensive as it is in so cal

    0Reply
  • Account Closed
    Investor 路 Honolulu, HI 路 Member since 2013 路 3k+ posts 路 1k+ votes
    10y
    Originally posted by @Red Peterson:

    Heard it more than once in podcasts that a good rule of thumb is getting a property rented out for 2% of the purchase price. Question: which market is this applicable? Is this only on certain states and expensive properties? Has anyone been able to get like $2k rent from a 100k property or something similar in this price range? Thank you in advance for all inputs.馃槉

    Red, since you are starting out try to be critical in your thinking.  The Price to Rent ratio consists of two MARKET derived numbers, Price and Rent.  So if rent is $1,000 then in a 2% market buyers are only willing to pay $50,000 for the CHANCE to collect that rent.  Now in a .7% market buyers will pay $143,000 for the CHANCE to collect that exact same rent.  Why do you think buyers are willing to pay so much more?  Probably because expenses are higher on the higher PTR properties but more than likely it is mostly because of appreciation.

    The PTR ratio is a very poor metric.  You should be looking at changes in market values and rents.  In my markets where the PTR ratio is around .7% I see values increasing around 9-11% annually.  So every $100,000 increase in market value gives me a $700 rent increase.  Now if I have a $50,000 house at 2% then this house that was worth $50,000 ten years ago and maybe $45,000 20 years ago then I will be losing money at 2% since my non fixed costs will keep increasing and the rents will be eroded by inflation. 

    See how you can make so much more money by NOT concentrating on PTR ratios.  Usually someone focusing on that is trying to sell you a non profitable property.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    10y

    @Account Closed  thank you for explaining this...  RISK = Reward.

    fix operating cost on lower end homes or functionally obsolete homes as is much of the mid west urban core were you can find these remains constant or more than other assets compared to value.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Chinmay J.
    Investor 路 Northern, VA 路 Member since 2016 路 1k+ posts 路 904 votes
    10y

    Really not fond of 2% rule. In any highly populated area like the DMV area that I live in, that's almost impossible. For me to reach to 2% rule for some of my properties, I will have to rent each room out like a hotel/lodge. That's the only way I can get to 2% rule.  

    0Reply
  • Stan Sugarman
    Investor 路 Decatur, GA 路 Member since 2015 路 313 posts 路 207 votes
    10y

    There are opportunities in Atlanta for rentals meeting the 2% rule. They are not as plentiful as a few years ago but I have seen investors taking them down.

    0Reply
  • Katrina P.
    Investor 路 Randallstown, MD 路 Member since 2010 路 185 posts 路 57 votes
    10y

    Midwest is definitely the place to achieve 2% or more. Like Dawn mentioned above, that's also where I make my money. In MI, I often achieve 3.5% - 4.5%. The most I've gotten was 7%. My most recent was a purchase for $11k, and I put in $10k....I rent it for $785. These numbers are possible in parts of MI (not Detroit), OH and IN. It's possible...just have to search.

    1Reply
  • John Lee
    Santa Ana, CA 路 Member since 2016 路 39 posts 路 54 votes
    10y

    Good and helpful points by all.

    One way that I describe it to my friends who are interested in REI is that there are 5 ways to make money in real estate, and usually you are going to make a trade-off. If you want to maximize cash flow, you will probably lose out on equity appreciation. If you want to maximize equity appreciation, you will probably not cash flow well or at all (SoCal!).

    5 Ways to make money in REI (from a blog post on BP, I think)

    1. Equity capture at time of purchase (buy a $100k house for $70k)

    2. Cash Flow (pay $1200 in monthly expenses= PITI + all expenses including CapEx, vacancy, and maintenance, BUT make $1400 in rent = net $200 monthly cash flow)

    3. Equity appreciation (buy a $100k house and 2 years later, it is worth $135k)

    4. Tax benefits (depreciation, Real Estate Professional loophole, interest deductions)

    5. Principal pay down by renters (your renters are paying off your $75k loan to $0 over time)

    #1 - #3 usually involve trade-offs.

    If you buy an out-of-state, cash-flowing, turnkey rental, you can realize great cash flow but you are likely overpaying a little (no equity capture) and will likely not see great appreciation. If cash flow is important to you, then this is a great investment.

    Most people consider SoCal and NorCal an equity appreciation play. Cash flow may not be realized, but many count on their property going up, possibly doubling or more in value. This has been realized in the past, even in recent years, but most see right now (mid-2016) as not a good time for that kind of play as prices don't have much more room to go up. Critics of this argue that you can't predict the future, but there is no denying that people have made a ton of money over the years in CA and similar markets through appreciation (esp post housing crash).

    Flipping is obviously not about cash flow or anything else, but equity capture at time of purchase.

    BRRR combines equity capture, cash flow, and possible appreciation, so it has gotten a lot of interest, esp in the BP world. It's like flipping a house and selling it to yourself (financed through a bank who pays you for the house), then renting out the house w/ positive cash flow. Sounds great, but not as easy to execute (although not impossible as many are doing it).

    If you find a house that you can (1) buy for 70 cents on the dollar, (2) cash flows $1000 per month with great tenants, and (3) is in a great appreciation area in an A or B neighborhood, then you've found the holy grail of real estate! Let me get a piece of that deal!

    3Reply
  • Andrey Y.
    Specialist 路 Honolulu, HI 路 Member since 2014 路 1k+ posts 路 1k+ votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @Red Peterson:

    Heard it more than once in podcasts that a good rule of thumb is getting a property rented out for 2% of the purchase price. Question: which market is this applicable? Is this only on certain states and expensive properties? Has anyone been able to get like $2k rent from a 100k property or something similar in this price range? Thank you in advance for all inputs.馃槉

    Red, since you are starting out try to be critical in your thinking.  The Price to Rent ratio consists of two MARKET derived numbers, Price and Rent.  So if rent is $1,000 then in a 2% market buyers are only willing to pay $50,000 for the CHANCE to collect that rent.  Now in a .7% market buyers will pay $143,000 for the CHANCE to collect that exact same rent.  Why do you think buyers are willing to pay so much more?  Probably because expenses are higher on the higher PTR properties but more than likely it is mostly because of appreciation.

    The PTR ratio is a very poor metric.  You should be looking at changes in market values and rents.  In my markets where the PTR ratio is around .7% I see values increasing around 9-11% annually.  So every $100,000 increase in market value gives me a $700 rent increase.  Now if I have a $50,000 house at 2% then this house that was worth $50,000 ten years ago and maybe $45,000 20 years ago then I will be losing money at 2% since my non fixed costs will keep increasing and the rents will be eroded by inflation. 

    See how you can make so much more money by NOT concentrating on PTR ratios.  Usually someone focusing on that is trying to sell you a non profitable property.

    I was about to write something in the same gist, but had a feeling Bob would come in and write it more eloquently. Think of it this way, a higher rent/price ratio virtually guarantees that the IRR of the property will be LOWER. This is assuming you are purchasing an investment property not a mansion to owner occupy yourself.

    0Reply
  • Red Peterson
    OP
    Sycamore, IL 路 Member since 2016 路 48 posts 路 14 votes
    10y

    I really appreciate everyone's input. Wow; this place is a gem! Im so glad I joined BP!

    Bear with the next stuff I am going to say; might be a little funny. But im serious. Has anyone read something and felt like its written in English but it sounds like maybe an alien talk? 馃榿 Oh boy! Im not going to let it scare me and will treat it as a challenge to learn more. As novice as I am, I find it   challenging to know what to learn and how to learn what I dont know. It literally feels like swimming in a vast ocean trying to figure out which direction to swim while learning how to swim. 

    Please keep the comment going on this topic if anyone wants to jump in. Im learning. 

    I will post another question relating to acronyms in REI (just like that) that I am not familiar with. I try to make out what SFR, SFH, PTR, PITI, BRRR and many more but I'd rather ask and find out what they mean than pretend to myself that i know them. 馃槄

    0Reply
  • John Lee
    Santa Ana, CA 路 Member since 2016 路 39 posts 路 54 votes
    10y
    Originally posted by @Red Peterson:
    I will post another question relating to acronyms in REI (just like that) that I am not familiar with. I try to make out what SFR, SFH, PTR, PITI, BRRR and many more but I'd rather ask and find out what they mean than pretend to myself that i know them. 馃槄

    SFR = Single Family Residence
    SFH = Single Family Home (pretty much same as SFR)
    PTR = Price to Rent (as in 2% rule = Price to Rent ratio is 2%)
    PITI = Principal, Interest, Taxes, Insurance (If your mortgage payment is impounded, these are all the costs in your monthly mortgage payment)
    BRRR (or BRRRR) = Buy, Rehab, Rent, Refinance, (Repeat)

    2Reply
  • Red Peterson
    OP
    Sycamore, IL 路 Member since 2016 路 48 posts 路 14 votes
    10y

    鉂わ笍 Thank you sir! You're on it!馃槉

    0Reply
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