Am I crazy to think 1 percent rule doesn't work in Phoenix / Scottsdale?

Question

Hello community,I'm Sagar Mukala from San Francisco, a newbie considering out of state investing in Phoenix area to build a portfolio of properties. It is appealing to me because of the ability to catch a short flight and land in Phoenix to manage the properties when needed.My goal:* Invest in a single / multi family property worth $300K in a quality neighborhood (class B or above) to buy and hold* Target is positive cash flow, build equity over timeThe following factors make Phoenix attractive to me:* +2.3% population growth since 2020* Strong Case Schiller index * Presence of large employers like Amazon, Walmart, and $40B investment towards a semiconductor facility that is projected to complete in 2026Challenge:* I'm consistently seeing rents in the $1900 - $2000 range for single family condos in (2B, 1 Ba) range making it a negative cash flow prospectQuestions to the community:1. Does the 1% rule work in Phoenix / Scottsdale area? If yes, what are some quality neighborhoods (low crime rate, higher avg. house hold income, proximity to public transport etc.) you recommend investigating?2. Are there any other favorable cities for out of state investors do you recommend I investigate further?Thanks!

Noah Corwick · Answer

Hi Sagar!

I agree with the comments here as well, the 1% rule is not realistic with most properties here.

If you really do believe in PHX/AZ, I think targeting a SFH equity play right now is definitely the move. As others noted, $300k wont move the needle too much out here unfortunately. And even if you do find one, it'll likely need a solid rehab/refresh anyways, which will make you go above your budget anyways.

My plan of attack would be to target C areas that are projected to become C+/B's in the future. Certain cities are growing tremendously, so you might not need to wait overly long for things to come to fruition.

Bryan Hartlen · Answer

@Sagar Mukala you’re correct you won’t find anything in Phoenix / Scottsdale or almost any national metropolitan market. Especially in a class B neighborhood. 1% rule does exist in some smaller tertiary markets and even there generally class C.  We have properties in Class C neighborhoods in Birmingham, AL that met the 2% rule but those are getting hard to find.

One other thought for you to consider - if you’re expecting to fly to your properties to handle situations, I’d suggest you reconsider. Unless you have your own plane, even a short flight puts you 4 -5 hours away in the best case, and realistically 6 - 24 hours out. If it’s an emergency you need to be there asap, if it’s not an emergency then you don’t want to have to fly somewhere to handle it. If you invest remotely, build a team and let them handle issues. You visit only if and when you want to. This will let you invest anywhere.

Sean Bozigian · Answer

@Sagar Mukala The days of finding deals that meet the 1% rule here are behind us (for now at least). You'll have much better luck in other areas of the country if that is your primary focus. The Phoenix area is viewed more as a long-term appreciation play for many - your statistic on population growth being one of the many contributing factors.

Walter Moneypenny · Answer

You will need to view the area as a long term investment. A 300k purchase is not going to get you a lot in Phoenix or anything in Scottsdale proper. The edges of the metro area are over 300k as well. The 1% rule will not work. A 3 BR rental in Phoenix, Glendale, Peoria may get you $2,000.

We have a lot of jobs heading this way due to the investment of several companies, like TSMC. The areas that those companies are in are going to be a great place to buy.

Scott E. · Answer

You're not going to meet this "1% rule" in Scottsdale, that's for sure. Phoenix is big so I'm sure there are rougher parts of town where you can get close.

You say you're focused on condos though. That means you need to do much better than 1% on rents. The HOA dues are going to eat up a bunch of cash flow.

If you need any feedback about specific pockets of town let me know. I've lived here and invested here almost my entire adult life.

Sagar Mukala · Answer

Thanks everyone for your thoughts. Key takeaways for me should I decide to invest in Phoenix are:1. Build a strong team (Core 4: Agent for lead generation, Contractor for light rehab / occasional fixes, Lender for financing, Property manager)2. Forget about cashflow and focus on equity play driven by appreciation3. Focus on single family homes as condos tend to bleed HOAPlease feel free to add to the list above incase I missed any. I'm planning a trip to Scottsdale in two weeks. If you are available, I'd love to meet and chat about your experience investing in the Phoenix / Scottsdale area. Cheers!

Justine Phillipson · Answer

Hi Sagar! I'm going to send you a direct message! I think Phoenix is a GREAT investment area, but it will depend on your financial goals and investment style.

Am I crazy to think 1 percent rule doesn't work in Phoenix / Scottsdale?

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