I Finally Captured the Elusive 2% Property. Here’s How it Happened.

by | BiggerPockets.com

One of these things is not like the other:

  • Abominable Snowman
  • Bigfoot
  • Vampires
  • Loch Ness Monster
  • Santa Claus
  • Man in the moon
  • Free lunch
  • Perpetual motion machine
  • 2% properties

Yes, there is indeed a Santa Claus. And I bet you did not know that he pays $900 per month in rent for a small 3-bedroom, 2-bath, brick-on-slab house with ceramic tile floor and new bath inserts where he and the missus raise a brood of miniature people who have excellent carpentry skills. Not exactly common knowledge, right?

In this day and age, however, what people don’t believe (and scientists have tried for years to disprove) is that Santa’s landlord only paid $45,000 a few months ago for the house he rents to the Claus family.

That’s right—people don’t believe this because there is no such thing as a 2% property, just like there is no Bigfoot or Nessie. An investor can’t find property that can rent for 2% of the purchase price per month. It’s simply a childish myth or perhaps maybe just a dream of a better day.

Well…

I have great news for the non-believers. With diligence, research, and an able real estate agent as a sidekick, 2% properties can be spotted and, in fact, captured in the wild. They aren’t common, but pockets of them exist in certain markets around the country.

multifamily-markets

Hunting the Elusive

At year-end 2017, my unit count stood at 122. Cash flow was good. I had capital that could be put to use. My portfolio loan-to-value was enough below my banks’ requirements that I could afford to hunt for attractive deals. And I was bored.

Looking around, my home market didn’t produce any good results. Ruston, LA is a small-market college town. Rents run about $400 per student/bedroom for housing, but the market prices that demographic at a premium. A 3/2 house will sell for $135-150k but only get about $1,200/month in rent. That might be good for parents putting a kid through school, but I prefer a much higher return on investment. The local market pretty much sucked.

What’s an investor to do? Being a big proponent of diversification, I had been already been thinking about whether and where to further diversify geographically. Several years ago, I bought 6 units in Pensacola, FL near where my brother lived. That was the natural place to start looking to snare a juicy deal.

Related: The 2% Rule Should Die a Horrible Death

Newsflash: The Pensacola and Florida Panhandle market are pricey (you guys probably already know that). On the one hand, my research told me that the 6 units I owned had appreciated 50-80% since I bought them. On the other hand, the rents did not justify further purchases in the Pensacola market. Kind of a good news/ bad news situation. So no luck there either.

Sighting the Quarry

In February of this year just after the Super Bowl, I started hunting in earnest (had to have something to do with my free time with football season over). On a whim, I looked at the market in Jackson County, Mississippi, where I grew up. Like footprints on a trail or a scent in the air, I found hints that conditions were favorable for finding 2% properties.

In the town Pascagoula, Realtor.com listed several dozen properties under $65,000. The online pictures showed clean and, on occasion, remodeled houses at an attractive price point. So I started searching for houses available for rent. That was I caught the first glimpse. The three or four basic houses for rent were all listed for $900+/per month. OMG!

I was hot on the trail.

Inside Info

Naturally, I turned to a local agent—an outfitter, if you will. Someone who lived here, knew the territory, and could scout any and every possibility. I lucked out and met Kimberly Bradshaw, a no-nonsense, numbers type who would go anywhere and do anything needed to find great investments. Kim is an agent for Rovira Realty, the listing agent for several of the houses on the MLS. If anyone could help me prove the 2% property’s existence, it was her.

At this point, I was sure we would find the truth. It was just a matter of laying eyes on it.

Success

There is was: 3714 Dale Street.

  • Projected rent of $800/month.
  • Attractive listing price at $44,900.
  • Motivated seller.
  • Accepted contract at $37,000.

BOOM.

I’ll never forget it.

Related: How I Navigated My First and Most Life-Changing Real Estate Deal

Kim and I spent two weeks making about 20 additional offers on other properties hoping to get a repeat. Alas, it didn’t happen.  But by any measure, this was a success. On June 14th, I closed 10 single family homes in Jackson County, Mississippi. The total purchase price was $594,000, with a gross rent of $8,620 per month for an average ratio of 1.44. That’s a GOOD number.

Even better, we contracted an additional 8 single family houses in the same area. These close on August 31st.  The total purchase price is $445,000, with a gross rent of $6,700 per month for an average ratio of 1.44. That’s a GREAT number.

Together, these properties will cash flow over $5,000 per month after expenses. That’s a FANTASTIC number.

So, in the end, Kimberly and I were able to put 2% properties in the same category as Santa Claus. They really do exist. They can be found. But you might have to search pretty hard to find them.

So, what do you think: Are you more likely to spot Bigfoot or a 2% property? Do you have any deals that approach these kinds of numbers?

Let’s talk below.

About Author

Jay Strickler

Depending on which day of the week it is, Jay is a 30-year oil and gas project manager and owner of about 160 rental units in three states. He harbors faint hopes of ditching corporate life someday to travel and spend more time with family and friends.

34 Comments

  1. Egan Lohman

    Haha! That’s awesome Jay, fun article. Couple questions:

    1. Looks like Pascagoula, MS is pretty small (22k pop). Any idea what vacancy rates might look like? Obviously a smaller town doesn’t concern you, and I get that you’re from there, but any advice on what metrics you look for when evaluating a smaller town – i.e. pop growth, crime rates, employment, income?

    2. Did you finance these properties, or pay cash? If you paid cash, could you have financed them? I.e. would a bank have loaned on them or did they need rehab?

    Thanks again for sharing!

    Egan

    • Jay Strickler

      Good questions and I have a blog post coming on that market. Long story short, Pascagoula is part of a larger metro-lite area in Jackson County. Huntington Ingalls Shipbuilding, where my father retired is located there. It has plans on expanding by several thousand employees over the next few years. So, good paying jobs and population growth convinced me to buy.

      I financed the properties through a local bank with 20% down and a 20 year amortized loan that balloons in 60 mos.

      Thanks for the response!

      Jay

    • Jay Strickler

      Absolutely right, and that’s why I posted the blended returns for all 18 house. Very happy with where I ended up. As a side note I am looking at a 9plex that is a 2.3. Hope that one works out:-).

      How would you describe your average rental? >1.5%? Do you have a minimum threshold?

      Happy hunting

      Jay

  2. Paul Ewing

    My best purchase was 3.5% but that was from 2014. I have to make the 2% properties now. Buy a lot, add water, septic, and electrical. Then move a used doublewide on and rehab it. I have done three of those this year and I can get $1000-$1200 rents from $48k-$55k in investment. Problem is that it is a cash game and the only things you can really use OPM for is the initial land and what you can get from short term personal loans.

  3. Scott Schultz

    I have a couple in my portfolio that are just above 4% . my typical deal is all in purchase and rehab at $35K with an ARV of $70+K with rents of $700-$900/mo, my markets are not for everyone, I do well in small and rural towns as well as country properties. you have to understand these areas, its not for everyone, someone unfamiliar could easily get burned bad. But it works for me

  4. Cody L.

    I just paid $6m for a property that brings in about $120k/month in rent roll. So that’s about that same ratio.

    And this is a good property (made up of a large apartment building plus several duplexes). Onsite leasing office.
    Easy to manage, etc. Right near the downtown area of Houston.

    Great deals are out there. You just have to be in a position to pounce when you see one.

      • Jay Strickler

        I started by looking in places where I had any kind of contact. Maybe a family member, a friend that moved away, or an old college roommate. That gives you a feeling of familiarity even if you don’t have them do anything for you. My first out of state investment was in Pensacola where my brother lives.
        Just a personal opinion – don’t let the fact that you are a woman hold you up. If it makes you feel more secure, reach out to other female professionals in an area you have an interest in.

  5. Kiki Helland

    Sounds wonderful! I am about to close on a 1031 exchange and looking to pull out of an expensive market and expand portfolio. I am considering several cities through turnkey providers but the numbers are as great as you all have experienced. How can this be done out of state without resorting to turnkey companies?

    • Jay Strickler

      1) Pick a city or market
      2) Scour the MLS
      3) Contact listing agents
      4) Ask for other properties they may know of
      5) Contact property managers
      6) Ask if they know of good rentals for sale or agents that know the investment property market.

      Hope that helps.

      Jay

  6. Marla B.

    These replies are encouraging – it’s good to know there are places that can still offer 2% or even 3% opportunities.

    I’m going to have to read up on the 1.44 ratio…don’t know this metric.

    Thanks for sharing all.

  7. Brian Pinckard

    Informative and entertaining post Jay! Despite all the “that’s nothing I got ___” posts the 2% investment is a tough find in a lot of markets. My last two were in the 1% range and I was happy to find them. They were B+ properties I hope will have very low vacancy rates and good appreciation.

    • Jay Strickler

      I have absolutely no knowledge of the Atlanta market. There was a podcast on investing in cities I found interesting. The guest’s (can’t remember which one) thesis was that the best properties were in areas with a 24/7 lifestyle, i.e. universities, medical centers, etc. By looking at where these areas overlapped he was able to pick high-quality investments with long-term viability. Maybe thinking through the problem like that or with your own criteria will help you figure out the Atlanta market.

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