What happened to the 2% rule
Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes
What happened to the 2% rule
Most Popular Reply
Member since 2018 · 23 posts · 13 votes
3yQuote from @Marcus Johnson:
Quote from @Dan Williams:
Real Estate is getting far more competitive. The promotion of wealth and business through Real Estate Podcasts and Books is quite high compared to 10 years ago; not to mention AirBnB rentals coming into the fold. David Greene has mentioned a few times in his Podcast that 10 years ago you could practically do no wrong.
What about prior to 10 years ago? Did those investors get lucky? My parents have owned farm land and housing throughout the 70's, 80's and 90's and made a killing by making good choices long term. My point goes to show that cash flow continues to go down hill and IMO it's the appreciation that is important. I'm glad I got out of this current market and plan to get back in when I think I can make good money again.
Good luck getting back into the market. There are a whole lot of inventors from Wall Street to Mom & Pop waiting to gobble up good deals. As I said, much harder to find deals now.
40 Replies
- Member since 2018 · 23 posts · 13 votes3y
Real Estate is getting far more competitive. The promotion of wealth and business through Real Estate Podcasts and Books is quite high compared to 10 years ago; not to mention AirBnB rentals coming into the fold. David Greene has mentioned a few times in his Podcast that 10 years ago you could practically do no wrong.
- Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes3y
No one had confidence in the long term value proposition of real estate coming out of the great recession, so properties needed to cash flow, aggressively, to make sense. Fast forward 10 years and sediment has changed and we see that due to under building, housing is becoming scarce, and appreciation is going to take place in desirable places where people want to be.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
This is not a rule anymore, property value and rents have not seen the same appreciation and will never balance out even at 1% unless you are in C class neighborhoods.
- Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes3y
Quote from @Dan Williams:
Real Estate is getting far more competitive. The promotion of wealth and business through Real Estate Podcasts and Books is quite high compared to 10 years ago; not to mention AirBnB rentals coming into the fold. David Greene has mentioned a few times in his Podcast that 10 years ago you could practically do no wrong.
What about prior to 10 years ago? Did those investors get lucky? My parents have owned farm land and housing throughout the 70's, 80's and 90's and made a killing by making good choices long term. My point goes to show that cash flow continues to go down hill and IMO it's the appreciation that is important. I'm glad I got out of this current market and plan to get back in when I think I can make good money again.
- Member since 2018 · 23 posts · 13 votes3yI meant anything Less than 10 years ago, 40, 30, 20, 10 etc... Without the web, fewer people were able to know about all of the Real Estate opportunities and ways to get paid.
Quote from @Marcus Johnson:
Quote from @Dan Williams:
Real Estate is getting far more competitive. The promotion of wealth and business through Real Estate Podcasts and Books is quite high compared to 10 years ago; not to mention AirBnB rentals coming into the fold. David Greene has mentioned a few times in his Podcast that 10 years ago you could practically do no wrong.
What about prior to 10 years ago? Did those investors get lucky? My parents have owned farm land and housing throughout the 70's, 80's and 90's and made a killing by making good choices long term. My point goes to show that cash flow continues to go down hill and IMO it's the appreciation that is important. I'm glad I got out of this current market and plan to get back in when I think I can make good money again.
Good luck getting back into the market. There are a whole lot of inventors from Wall Street to Mom & Pop waiting to gobble up good deals. As I said, much harder to find deals now. - Member since 2020 · 671 posts · 937 votes3y
I guess I see it a little bit differently than you. I agree with you regarding the current market and I am not buying, but I'm definitely holding onto all of my properties as they all cashflow. It would be interesting for both of us to calculate the opportunity costs of our decisions in 10 years to see if I would've been happier selling and then rebuying or if you would've been happier holding.
In the end, finding properties, going through the purchasing and rehab process, getting approved with my lender, finding good tenants, etc. takes a ton of time in my opinion. I'm not excited about going through all of that again anytime soon!
Best wishes
- Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes3y
Quote from @Dan Williams:
I meant anything Less than 10 years ago, 40, 30, 20, 10 etc... Without the web, fewer people were able to know about all of the Real Estate opportunities and ways to get paid.Quote from @Marcus Johnson:
Quote from @Dan Williams:
Real Estate is getting far more competitive. The promotion of wealth and business through Real Estate Podcasts and Books is quite high compared to 10 years ago; not to mention AirBnB rentals coming into the fold. David Greene has mentioned a few times in his Podcast that 10 years ago you could practically do no wrong.
What about prior to 10 years ago? Did those investors get lucky? My parents have owned farm land and housing throughout the 70's, 80's and 90's and made a killing by making good choices long term. My point goes to show that cash flow continues to go down hill and IMO it's the appreciation that is important. I'm glad I got out of this current market and plan to get back in when I think I can make good money again.
Good luck getting back into the market. There are a whole lot of inventors from Wall Street to Mom & Pop waiting to gobble up good deals. As I said, much harder to find deals now.Thanks. My tax attorney is trying to get me into Commercial real estate, but it doesn't really excite me right now. I have envisions of doing storage facilities for boats, trailers, campers, etc. I have a lot of interest in dealing with this type of equipment and believe I could provide excellence in this area, but not ready to move forward until our primary is paid off which shouldn't be to many more years and we have zero debt. I also have interest in hard lending and short term rentals. I am very hands on and have built a lot of wealth because of that, plus I want a new career once I retire from the IT sector after 25 to 30 years with two pensions.
- Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes3y
Quote from @Chris John:
I guess I see it a little bit differently than you. I agree with you regarding the current market and I am not buying, but I'm definitely holding onto all of my properties as they all cashflow. It would be interesting for both of us to calculate the opportunity costs of our decisions in 10 years to see if I would've been happier selling and then rebuying or if you would've been happier holding.
In the end, finding properties, going through the purchasing and rehab process, getting approved with my lender, finding good tenants, etc. takes a ton of time in my opinion. I'm not excited about going through all of that again anytime soon!
Best wishes
Yep, who knows, opportunity costs could factor in, but for my wife and I, we were very successful with the labor and values adds, customer service we provided that allowed us to have excellent tenants and guest in our Airbnb, that after 9 years, the 2020 Minneapolis riots, watching businesses get trashed and burned to the ground, the market being at an all time high, I wanted out of Crimeapolis, so we cashed out on both properties, made a ton of money and have almost paid off our primary home.
We built wealth based on these decisions and will never look back. I cannot wait to see what the future brings.
- Member since 2020 · 671 posts · 937 votes3y
haha. There are some locales that I very much support vacating and Minneapolis is one of them!
- 3yJeff SchemmelBusiness MemberReal Estate Agent · Saint Paul, MN · Member since 2014 · 384 posts · 401 votes
Quote from @Chris John:
haha. There are some locales that I very much support vacating and Minneapolis is one of them!
care to elaborate on that? I'm curious what your reasons are! :)
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes3y
Ive been buying properties for almost 15 years at 0.5%. Ive done just fine.
District Invest Group545 Reviews - Rental Property Investor · Palm Bay, FL · Member since 2009 · 511 posts · 290 votes3y
Quote from @Chris John:
I guess I see it a little bit differently than you. I agree with you regarding the current market and I am not buying, but I'm definitely holding onto all of my properties as they all cashflow. It would be interesting for both of us to calculate the opportunity costs of our decisions in 10 years to see if I would've been happier selling and then rebuying or if you would've been happier holding.
In the end, finding properties, going through the purchasing and rehab process, getting approved with my lender, finding good tenants, etc. takes a ton of time in my opinion. I'm not excited about going through all of that again anytime soon!
Best wishes
I agree with you on this. We got into real estate in 2009 when everyone thought we were crazy since the market had just crashed. I was VERY tempted to sell some of my rentals these last few years of crazy appreciation BUT I thought to myself....where would I find a house like THIS for the price I paid for it 10+ years ago? And....the rents continue to increase. I'm still seeing the 2% rule in my portfolio so I resisted the temptation to sell. Now on the other hand, the houses I acquired over the past few years I have absolutely no problem selling for a profit to pay off some others.
- Member since 2020 · 671 posts · 937 votes3y
I got taken behind the woodshed by Gavin Newsom and California during coronavirus. Whether I'd make more money or not isn't the issue for me, I'd rather have my money where I don't have to participate in crony capitalism where the most connected investors are the most successful. Minneapolis strikes me as a similar type of enclave.
- 3yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Russell Brazil:
Ive been buying properties for almost 15 years at 0.5%. Ive done just fine.
In 2021, why would you have purchased a property with 0.5% ratio? Even in San Diego I was finding 1% ratios in high appreciation areas that had good value adds.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes3y
Quote from @Dan H.:
Quote from @Russell Brazil:
Ive been buying properties for almost 15 years at 0.5%. Ive done just fine.
In 2021, why would you have purchased a property with 0.5% ratio? Even in San Diego I was finding 1% ratios in high appreciation areas that had good value adds.
Because that's the standard rent to price ratio in my market and has been for a very long time.
Frankly Im shocked that is the case in San Francisco. So you're saying a $1 million property in San Francisco rents for $10,000 per month? Here it rents for $5,000.
District Invest Group545 Reviews - Member since 2018 · 23 posts · 13 votes3y
Quote from @Dan H.:
Quote from @Russell Brazil:
Ive been buying properties for almost 15 years at 0.5%. Ive done just fine.
In 2021, why would you have purchased a property with 0.5% ratio? Even in San Diego I was finding 1% ratios in high appreciation areas that had good value adds.
1% rule, high appreciation, and good value add? That's quite the property in CA or anywhere really. My skeptical hippo face is forming...
- Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes3y
Quote from @Jeff Schemmel:
Quote from @Chris John:
haha. There are some locales that I very much support vacating and Minneapolis is one of them!
care to elaborate on that? I'm curious what your reasons are! :)
For me it was crime. I had a duplex in South Minneapolis for years and was running a successful business. But then in 2020 the summer of riots. I watched the Holiday station get burned to the ground on 46th and the Walgreens get looted. When I drove to work during that time from the South, you could see black smoke high in the air from the burning of buildings, it looked like a war zone. I have footage of the Target on Lake being looted, Dominos burned up, the liquor store looted, many other businesses burned to the ground the what I will never get out of my mind is what looked like Niagra Falls coming out of the second floor of a huge building to put out the fires. Not to mention the anarchy where they burned down the 3rd precinct police building. After 4 days there was finally the National Guard out to cool off the riots. Employees where I worked were very concerned about car jackings. We were told to stay home for a week during the riots and when it was clear you would see National Guard troops armed on the corners.
This wasn't the only reason we sold our duplex, but it was a huge reason, Minneapolis just became to scary and a lot of crime. We didn't want our tax dollars to support the city and thought it was a good idea to get out while the price was right.
- Lender · Southwest Georgia · Member since 2017 · 315 posts · 278 votes3y
I actually was running a scenerio yesterday that i think many investors will start to look at. Most people will say they need to net cash flow 150-300 a month in cash flow. And with most people buying rental properties around 150k-250k that would mean you would put down roughly 30-50K in down payment to get that cash flow.
If you put that same money into a 3 month or 1yr Treasury you get similar cash flow of 120-200 a month, risk free.
Again, this doesn't take into account the added gain in principal paydown and appreciation, but the treasury also doesnt have vacancy risks, repair issues, slow pays, or falling market. Also the short-term treasuries are more liquid.
So if you are looking for just straight cash flow, there are better options out there than real estate.
- Member since 2018 · 23 posts · 13 votes3y
Quote from @J. Mitchell Bernier:
I actually was running a scenerio yesterday that i think many investors will start to look at. Most people will say they need to net cash flow 150-300 a month in cash flow. And with most people buying rental properties around 150k-250k that would mean you would put down roughly 30-50K in down payment to get that cash flow.
If you put that same money into a 3 month or 1yr Treasury you get similar cash flow of 120-200 a month, risk free.
Again, this doesn't take into account the added gain in principal paydown and appreciation, but the treasury also doesnt have vacancy risks, repair issues, slow pays, or falling market. Also the short-term treasuries are more liquid.
So if you are looking for just straight cash flow, there are better options out there than real estate.
I'd say that's the bare minimum in cash flow return. I'd be looking for at least double the cash flow are the numbers you've given for real estate.
- Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes3y
Quote from @Marcus Johnson:
Just prior to my first real estate investment in 2014, the 2% was heavily promoted by Brandon Turner. Then more recently it was lowered to the 1% rule. Now the current staff are promoting around .8%. So interesting how the expectations for cash flow has just bottomed out to under 1%. Does anyone else find that fascinating? We bought a duplex in 2014 for 180k and rents were $2,500. That property just sold for 375k, so that means the new owners aren't even getting a cash return on rents of .6%. I've sold all of my rental properties now, because the market was insane in 2021 and 2022, people would do almost anything to get into the market. Our goals had changed and we wanted to pay off our primary before going back into real estate again. We couldn't be happier to have made out so well on our rentals and look forward to the future in some other type of investment.
Nothing I them weekly. Just picked up 5 duplexes, All in 75kish, rents will all be about 21k,-22k with nets of about 13k - 14k. Sf all in 65k, rent 1400 value about 125k, Its all about your team and knowledge.
All the best
- Lender · Southwest Georgia · Member since 2017 · 315 posts · 278 votes3y
That maybe so, but how much are you typically putting down on each deal? I think you said in another forum about 40%?
If you take that same dollar amount, I bet it will come pretty close to matching your cash flow numbers, and with zero risk.
- 3yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Russell Brazil:
Quote from @Dan H.:
Quote from @Russell Brazil:
Ive been buying properties for almost 15 years at 0.5%. Ive done just fine.
In 2021, why would you have purchased a property with 0.5% ratio? Even in San Diego I was finding 1% ratios in high appreciation areas that had good value adds.
Because that's the standard rent to price ratio in my market and has been for a very long time.
Frankly Im shocked that is the case in San Francisco. So you're saying a $1 million property in San Francisco rents for $10,000 per month? Here it rents for $5,000.
Oops I had a typo. In 2012 you were purchasing properties with a 0.5% ratio in your market? Why?
in 2012 in my market, there were many 1% properties (mostly small multiplex) Properties for $350k to $400k that would rent at 1% today they are over $1m and normal is ~0.6% with over 0.7% being slightly rareMy market is San Diego, and in 2021 1% properties are unicorn finds but I found one in 2020 (they were unicorn finds in 2020).
Good luck
- Member since 2018 · 23 posts · 13 votes3y
Quote from @J. Mitchell Bernier:
That maybe so, but how much are you typically putting down on each deal? I think you said in another forum about 40%?
If you take that same dollar amount, I bet it will come pretty close to matching your cash flow numbers, and with zero risk.
I'm typically putting down 25%, the 40% is from growth without refinancing and 1 cash offer. My recent purchase was $54K down including expenses and is $450 profit from Rent/Mortgage. That's 10% (450 * 12) / 54K but of course, it doesn't include repairs and any vacancy although my vacancies are typically low. The repairs should be fairly low since it's a remodel (superficial) with new appliances.
Honestly, I don't even consider this a very good deal, I might have pulled the trigger too soon. The house was just super clean in that it was newly painted, new flooring, 3 bed/2ba, in a good neighborhood, brick exterior (durable) and priced at 200K so I was quick on the buy. I think going forward I need to find a little bit better deals to make it worth it. The deals I found back when interest rates were low were awesome, but they were for everyone. - Lender · Southwest Georgia · Member since 2017 · 315 posts · 278 votes3y
@Dan Williams so for simple math, if you can get a monthly cash yield of $220 from a TBill that means your risk premium $230 a month.
So the question would be is that $230 a month extra worth the risk of owning properties?
This is a question as investors we have to start asking ourselves now that we hadn't been before. Before the risk premium was $400 a month when rates were low in that same scenario, but now that has changed is it worth it? Some will say yes, and others will say no, but the questions need to be asked.
I'm not suggesting you sale all your properties, but when examining new opportunities these are the types of questions we must be asking.
- 3yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @J. Mitchell Bernier:
@Dan Williams so for simple math, if you can get a monthly cash yield of $220 from a TBill that means your risk premium $230 a month.
So the question would be is that $230 a month extra worth the risk of owning properties?
This is a question as investors we have to start asking ourselves now that we hadn't been before. Before the risk premium was $400 a month when rates were low in that same scenario, but now that has changed is it worth it? Some will say yes, and others will say no, but the questions need to be asked.
I'm not suggesting you sale all your properties, but when examining new opportunities these are the types of questions we must be asking.
FIFY
“if you can get a monthly cash yield of $220 from a TBill that means your risk and effort premium $230 a month. “
Remember this $230/month is before vacancy and maintenance/cap ex which in my underwriting will consume more than the $230.
@Dan Williams to his credit did indicate it was too tight and he has to purchase with better numbers.In my pro forma that property would project way lower cash flow than I can achieve through Money Market or CDs. The money market/CDs are effortless and risk free.
I am not saying do not purchase RE. What I am saying is when doing your underwriting, the results should be compared with other options. This comparison should include effort and risk assessments. When taking into account effort, risk, and return, it is a rare property that presents the best opportunity in this current market.
I have not purchased RE since Dec 2021 (purchased $4m that month). I have only made one offer since then (and it was not close to the accepted offer). It is because I believe in the benefits of leverage. With the rate increases, financed RE is much more expensive than a year ago. These same rate increases have made it possible to obtain close to 5% in money market or CDs without any effort or risk.
Good luck
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