Rental / Multi-Family Homes at 2% rule too picky?

Question

I keep coming up with multifamily properties with landlords trying to get out of being a landlord. My problem is even after looking up comps and doing my 70% - expenses formula in my spreadsheet my offer isn't even close to the 2% rule. I keep 2nd guessing myself because I keep seeing "investment property" listings all over in the 1.10-1.8% range as if they all believe that's the norm for a good investment deal around my area.

Ex:
- Home is worth $128,000
- Guy is asking $95,000, but is flexible/motivated
- 2 unit at a combined rent of $1200 a month
- assume for this example no repairs needed
- My offer is between 54k-64k after my cut and closing costs
- Sell it to investor/another landlord for $89,600
- 2% rule = 1.22%

Is that still a good deal? I guess I'm trying to figure out if my wholesale formula is screwing up good deals for rental properties. I always shoot for 2%+ and I know that they are hard to come by, but am I passing up opportunities to make money?

Bruce M. · Answer

Agree on the other comment that the 2% rule does not work in many areas, yet it does in others. In many markets investors are willing to pay much more for properties. I have bought both using the 2% rule and not using it, and in many instances my properties that I bought under the 2% rule cash flowed better then the 2% properties, so I have found there are many variables involved here.

Account Closed · Answer

Michael: I'm from Grand Rapids and my familly is still there (and in Flint). While there are some areas of the country that the 2% is probably unattainable, GR is definitely a place where you want to pay attention the formula. In most places in the Rust Belt, there is plenty of housing and little or appreciation. You are only looking at cash flow plays. The deals you are seeing on the MLS are ones where people want to get out of AND they don't want to take a hit. Wishful thinking on their part and not your problem. Resist making their problem prop. your problem prop. Think about looking somewhere else besides listed properties. Lots of good ideas for that here on BP.

Andrew Jones · Answer

64k for 1200+ month rent sounds good to me and almost fits the 2% guideline perfect.

Michael Lerch · Answer

I could see someone choosing a rental property under 2% if it's cash-flowing $1200+ a month, but on the lower rent per month properties that net $400 per unit I could see the necessity for the 2% rule. I think I'm starting to understand.

Joel Owens · Answer

There are many markets where 2% is not attainable because buyers will purchase all day long at lessor margins.

You either buy in a different area or lessen your expectations for that area.

Michael Lerch · Answer

sorry the example is actually 1.34%. I played with my formula too much and broke it :-P

Rental / Multi-Family Homes at 2% rule too picky?

Rental / Multi-Family Homes at 2% rule too picky?

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