2% rule won't work in my market - now what?

[Sandy Hammer]

Hi, I am new to real estate investing and really appreciate how much I earn from your posts! I am researching how to analyze deals and am having a hard time with some of the amazing deals people post about on here. In my area nothing is listed for a price which allows a 2% rental fee. 1% seems to be lucky and I have comps from my realtor for sold multifamily properties for a price under 1% of current rents. What is your advice in a market like this? Pay the higher prices, invest elsewhere? Thanks so much, I can't wait for your help and expertise!

[Jon Holdman]

Originally posted by Bill Gulley:

Geeez, how many rules do you need? 1% when revenues exceed 500 bucks, 2% when it's different, 5% when it's something else.....did anyone pass highschool math class?

How many rules do you need? Why don't you learn how to look at any property by the facts at hand, that rule can never be out dated!

Why in the heck can't you people figure actual costs and provide reasonable estimates, is it that simple percentages makes your life easier for the lazy and stupid or is it that you need rules because you can't think?

Sorry, just can't get over all the "rules" you so called "investors" want to use......if you can't do simple math, dig ditches and get out of real estate! Thanks! Get out of the way of real investors.......

Really, you just need one - the 50% rule. The others , 2% for low rents, 1.5% for higher rents, are derived from that. Even the 50% rule has caveats. If you're willing to put in your own labor, 35-40% might be more reasonable. If you or your PM does a bad job, 50% might be too low.

The reason this is helpful is that new investors, and especially the people pitching properties to new investors, often claim you only expenses are taxes and insurance and that you'll never have a vacancy. The 50% rule may or may not be accurate for any particular property in any particular year, but its a heck of a lot closer than "cash flow = rent - PITI".

The "facts at hand" are often unknowable. How much will maintenance costs you? How long will the property be vacant between tenants? How much will you need for capital over the next 20 years? What should you allocated for a messy eviction? Any number you put for any of these is just a guess. By lumping it all into one big number - 50% - you avoid the temptation to skim a little off here, a little off there and make a bad deal look OK. Reality will be whatever it will be. You can't control that and you cannot predict it very accurately. The 50% (or less if you self manage) is just a way to account for that lack of predicitibity.

I personally dislike the 2%, 1% or any of those rules. And I agree, Bill Gulley you better be able to do math if you're going to be in this, or any, business. Excel or a financial calculator is essential and actually running the numbers on a prospective property is better than a rule of thumb.

-- Lazarus Long (aka Robert Heinlein)