Trying to figure out SF rentals

[Todd Willhoite]

I am looking at single family homes for buy and hold. In reading the forums it seems the higher cash on cash returns come from smaller houses in bad neighborhoods, at least on paper. It seems to me that those type of rentals will have people who will move often and trash the place. With higher turnover, more vacancy and the expense of repairing the place it doesn't seem likely the higher returns will materialize.

I have heard on the podcasts that cheap doesn't necessarily mean good. What are you looking for in a neighborhood when making a decision to buy a SF rental place?

What are typical cash on cash returns for SF rentals?

I read the rule of thumb of the 2% rule. So if a house sells for $100,000.00 it should rent for $2,000.00. In my area 2/1 houses start renting at $725 going up to maybe $1,000.00 for a real nice 3/2/2. So using the 2% rule the 3/2/2 only works if you can buy it for $50,000.00. I haven't even seen a 3/2/2 that needs a lot of work selling that cheaply. The 2/1 only works if can buy for $36,250.00. I'm not seeing any of those either.

Maybe I can buy a 3/2/2 built in 1980's that needs full paint, flooring, garage door, and some other work for $65,000.00 plus repairs. But it is in a neighborhood that is looking it's age, probably several rentals in the neighborhood and several owners not able/willing to keep up the maintenance on their homes. No major crime in the neighborhood yet. However I want to do buy and hold, and in ten or fifteen years this neighborhood will most likely be a dump with run down houses throughout the area.

I guess this is why they say look at a 100 houses make offers on 10 to buy 1. It looks like it will take a lot of looking to try and find a deal where the numbers work, especially in a decent neighborhood that has a chance of holding its value over the long run. Am I looking at this correctly, or have I missed something?