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 2019 · 223 posts · 261 votes3y
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.
I agree with you Mitchell. In my market a $200K house will get you about $1500 after all expenses you will probably net around $1000. So that's 12K on a 200K investment for about a 6% return. Or you could take that same $200K and but in a CD at 5% and get $10K. Is that $2K a year worth all the hassle and risk of owning a property, not to me.
Either rents need to go up or house prices need to come down. Hopefully both. For the foreseeable future I'm holding on to my rentals and just investing my cash in CDs and treasury bonds.
- 3yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
@Marcus Johnson I've never been a propoenent of the 2% or 1% rule to begin with. It doesn't say anything about the bottom line. On top of that, it's of no use when comparing opportunites across markets with different operting cost structures. A 1% ratio in TX which has some of the highest property taxes and insurance rates in the nation is far different than 1% in a market with far lower taxes and insurance. The only metric that matters is the bottom line and that is income and equity over time.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes3y
Quote from @Dan H.:
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
My first rental I purchased in the DC area rented for $1900 against a $300k purchase price. That was in 2009 in Rockville a suburb of DC. So that was 0.6% then. Today it rents for $3300 against a $600-625k value.
My 1st property in DC proper was $410k against $2,000 a month in rent in 2011. Today its at $4200 against an $850kish value.
There were some cheap condos I purchased in 2009-2012 about 50 miles outside DC. Those were in the 1% range to a little higher, $1250 in rent against $110k price. ($200 condo fee). Today if I had those they'd rent for $1400 against a $200k value. So those ratios way out there have compressed more than DC or its close in suburbs.
District Invest Group545 Reviews - 3yJeff SchemmelBusiness MemberReal Estate Agent · Saint Paul, MN · Member since 2014 · 384 posts · 401 votes
Quote from @Mark S.:
@Jeff Schemmel Politics,anti-landlord sentiment and taxes. Sold our Minneapolis properties a couple years ago and am glad I did.
Did you hold rentals in Saint Paul?
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
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.
Nicer places in my market have been .5%ers for a long time as well. It worked for houses when mortgage rates were low, as we have low property taxes and low insurance and tenants pay all utilities and take care of the yards and snow removal.
The play was equity capture. Easy for my 12% min discount to equal $50k- 10yrs of avg cf.
But duplexes need to be at least a .7%. Now w/s/g is owner-paid, but tenants still take care of the yards.
Triplexes+, we pay w/s/g and take care of the yards / snow removal. .8% min.
Not every asset type even fits into a generic % rule. Factor in utiltity costs in addition to local property tax and insurance premiums.
- Rental Property Investor · Member since 2021 · 2 posts · 1 vote3y
@Craig Janet here in Texas like most other markets property values and rents have not increased at the same rate.
I run numbers on properties every day that will net under 5% on a cash sale by the time I subtract Texas's high 2-3% property tax, insurance, 10% management, repairs, and vacancy.
With brokerage CDs now over 5%, for me it makes sense to pause on RE till prices come down/ rents increase.
If you are looking for a 7% + return its a waste of time running numbers unless the rents equal 1% of sales price I am finding.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
It’s not easy to get the 1% rule now. Everyone is investing in RE now vs 5-10 years ago. However, I’d rather park my cash in RE vs having it get devalued by the minute in the bank earning only 2 or 3% interest. Principal pay down, appreciation and that $300-$500 monthly net cash flow from my tenants makes these investments huge. Especially after a few years when market rent just keeps going up. So I’m ok getting the .8% or 1% rule at purchase. I’m pretty sure over the next 10-20 years real estate will go up just fine. I’d rather park my cash or use equity built up in my rentals ( by doing cash out refis) to buy more rentals, and let all these trees I’ve planted grow over time.
- Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes3y
@Marcus Johnson cash flow is only one part of the equation, it is very tight right now, but principal pay down and appreciation are the wealth builders.
Our investors look at cashflow in the beginning like a w-2, it is nice but it is not what will be driving wealth. If all you look at is initial cashflow from a property then yes invest in the stock market, T-bills, or whatever. Appreciation averages about 5.5%, principal pay down averages 1/2 the payment throughout the life of the loan (average loan maybe $1000/month) The cashflow greatly increases as the purchase ages as rents go up and the monthly mortgage stays the same.
You can get burned in real estate just like anything else and we have heard it’s a bad time to invest (look at the forums) for years, and yet real estate is still a great wealth builder. Stocks T-bills, and other investments should be in everyones portfolio too, but we look at real long term growth with housing.
- Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes3y
Quote from @Craig Janet:
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.
I agree with you Mitchell. In my market a $200K house will get you about $1500 after all expenses you will probably net around $1000. So that's 12K on a 200K investment for about a 6% return. Or you could take that same $200K and but in a CD at 5% and get $10K. Is that $2K a year worth all the hassle and risk of owning a property, not to me.
Either rents need to go up or house prices need to come down. Hopefully both. For the foreseeable future I'm holding on to my rentals and just investing my cash in CDs and treasury bonds.
Currently getting $17,500 for $200,000 with 8.75% first trust deeds. Something to consider in this market.
- 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 $2,500. That property just sold for 375k, so that means the new owners aren't even getting a cash return on rents of .6%. I've sold all of my rental properties now, because the market was insane in 2021 and 2022, people would do almost anything to get into the market. Our goals had changed and we wanted to pay off our primary before going back into real estate again. We couldn't be happier to have made out so well on our rentals and look forward to the future in some other type of investment.
Just picked up 4 more duplexs, all in 75kish, rents not less then 21k - 23k, nets of about 13- 14k, 2% rule is live and well.. Its all about knowledge and your network
- Member since 2022 · 186 posts · 192 votes3y
I’m new to real estate. But is the 2% rule basically you need to rent property for 2% of value of property. So a 100000 house should rent for 2000$/month. If so sign me up. I’m getting 1000$/month in rent on a 100k house and might be a bit low. But no one in my area could afford to pay 2k on an average 2 bed 1 bath house. I make pretty good money on my 9-5 with unlimited overtime and I couldn’t/want to swing that. Maybe I’m confused on what actually the 2% rule is
- 3yTim JacobPro MemberReal Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
1 of the reasons to advise against the 2% rule is it didn't really work in the long run. In general even in cash flow markets they were often D grade assets. The worst thing that can happen is a property there works and you get a good long term tenant. Often then the investor thinks its easy to replicate. Then the law of averages kicks in. Usually evictions and good pm won't touch it. I am fairly certain from discussions with people who have continued in those asset classes that they got absolutely killed during covid. Covid really told the investors to get out of low income rentals so there went 2% stuff. A lot of decent 1% properties went away with house prices rising. Thus the safe and good investment often times is now close to but maybe barely under 1% in a cash flow market or closer to .5% in a higher appreciation market.
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes3y
Quote from @Eliott Elias:
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.
I keep seeing this said, as I keep buying good properties in good neighborhoods of Houston (next to $$$ homes) that are 1%+ all day long. No way I'd buy a sub 1% property. With rates today you'd never cash flow.
I just put an apartment complex under contract that's in a super hip area of Houston. I'm paying right at $100k/door and the rents are just over $1k/unit/month. I don't love the #s (since 1% is my floor), but I happen to own a ton of stuff next to this one so it's worth it to me to buy it at that price as I have near $0 management cost.
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