Can you get 2% in Cali? or anywhere near the Bay Area?

[Diana Nakano]

So thank you Michael Evans I saw your answer for another post about how you can also use the 2% rule, which states that the monthly gross rent should be at least 2% of the purchase price.  If I put that into play I would be charging over 13000/Mo for rent in San Jose in a not so great area.  I wish!  I would love to sell the property that I have now to get something that is a better investment.  I worry because it is in San Jose and property values usually go up.  I have been binging the podcast and reading like crazy.  I am still trying to figure out how to turn a 600,000 house into something with more units and more income.

[Arlen Chou]

@Diana Nakano real estate investing in the Bay Area is a long game. The part that people don't realize is that the game is ever changing and they get hammered using fixed rules. There are basic parameters, like "location, location, location", or locking low interest rates is a force multiplier, or materials basically cost the same everywhere but labor expenses are vastly different based upon location.

I believe the percentage rules are a little deceiving. The question should be: are people buying 1% or 2% rule properties, or are they turning them into 1% or 2% rule properties over time. If it is the latter, how and how long does it take...

I think buying into a "rule" based property, in a major CA markets and probably any other major market is extremely difficult especially if you are buying on market deals. It might happen through an off market deal, but I would bet that most of those also get to one of the rules over a time of rehab and rent increases. 

I have personally reached 1% on several properties, but it took about 1 year on each property to reach that "rule". I do not close on deals that are cash flow negative, they must at least pencil out as breakeven. The real "juice" in this market is the appreciation. You can either ride the wave of appreciation or force it, and then pull money out via a refi and invest in another property to get more doors. This process takes time, but as you get more doors behind you the cycle of cash-out refi via appreciation accelerates. Also keep in mind that this process is much more tax efficient as you never have a taxable event. You technically could do a 1031 exchange from your SFR into something else, but in CA you create a situation where you have lost your low property tax basis on the property you sold and traded for a higher property tax with the new property.

Happy holidays and best of luck to you!