Will I ever find a property that meet 2% rule?

Question

I come across this article

https://www.realwealthnetwork.com/learn/best-places-to-buy-rental-property/#18-5-dallas-texas

All the cities listed here nowhere meet the 2% rule, most are around 0.7%

Does the 2% market still exist?

My goal is to maximize cash flow and also would be nice to get decent appreciation. I am interested in Cities in Texas and Florida where job and/or population are growing

How should I think about this? How do I make it work in Dallas/Houston/Orlando/Tampa. I reside in CA so I don’t know the cities that much

Jon Schwartz · Answer

Martina, no need to excuse yourself for newbie-ness. That's what the forums are for!

Cash-on-cash return is the amount of profit after you've paid all expenses and the mortgage divided by the amount of money you put into the investment to begin with.

Let's take an example: if you buy a $500K duplex to rent, you'll need $100K down payment plus closing costs, etc. Let's say the total amount of money you need to buy the building is $120K. That's your cash in.

Each month, you collect rent from your tenants, pay the water bill, pay the gardener, pay your mortgage, and end up with $200 left over. That's your cash out for the month.

$200/month equals $2400/year. To calculate your cash-on-cash return, you divide $2400, your cash out, by $120K, your cash in. 2,400/120,000 = 2%

Does that make sense?

I think there are plenty of good submarkets in the San Gabriel Valley! I like a lot of areas from Alhambra through El Monte. Where does your husband's family live? I would certainly be happy with a property in El Monte that has a cash-on-cash return of 2% and is in a area that's improving and seeing development.

Evan Polaski · Answer

@Jon Schwartz I was making the assumption you were accounting for reserves, but I see a lot of people that do not seem to be adequately reserving, so I just want to call it out.

I once had a spreadsheet to look at what my monthly reserves should be even if I bought a brand new house, and came to over $250/month, using useful life and general cost for everything: roof, HVAC, water heater, bathroom remodels, kitchen remodels, appliances, flooring, paint, etc. and that was only if I had to replace at end of useful life. Clearly, things break sooner and tenants can put more wear and tear on items to wear them out before standard useful life.

Hugh Carnaha · Answer

Howdy OP!In my area there are things that meet the 2% rule. You can also "Make" 2% rule properties by doing a conversion to duplex/triplex, or adding a bedroom from a bonus room.As others have pointed out though, the 2% rule in most parts of the US mean it's some insane crazy deal that slipped through the cracks, or more often a C/D area. Or something really really wrong with the house.I'm not against looking at those at all. Just be cautious when you do. Most my stuff I target is 1.5% rule, and they are full off headaches, and are in sketchy areas. My goal is to buy the whole neighborhood though.As far as your question on Long Distance Real Estate Investing goes, If you haven't read it already. David Greene wrote the book "Long Distance Real Estate Investing", and it has GREAT tips for building a team to manage your stuff from afar.https://amzn.to/31tDmWK

Evan Polaski · Answer

@Martina Su, will we ever get back to a 2% rule for single family rentals, maybe.  But the problem is a lot of people will need to lose their houses to foreclosure, which will drive down property values, allowing you to get to those returns.  I will also add that often times even in 2010-11, when you could by decent single family rentals in some markets for less than a lightly used honda civic, the 2% rule was tough to hit when you really took into account reserves for repairs and capital items.

As Jon mentions, appreciation is a very real and relevant piece of real estate investing.  However, where BiggerPockets overwhelmingly is negative on it is when you are counting on it through market forces, not by forcing it.  It is one thing to buy a fixer upper, rehab it and either sell or rent for good money and refi.  In this scenario, you are forcing appreciation through improvements, and generally no one will question you logic.  In larger rentals, below market rents or a combination of below market rents and unit renovations is another way you force the appreciation of the asset.

When people are talking poorly of appreciation is if you buy a turnkey rental, or a flip today, and just assume the market will continue to drive the value up, even though you are not doing anything to truly add value.

Finally, on the cash on cash return, this is a very valuable return metric to know.  I am going to caveat Jon's answer slightly, that it is not necessarily your annual profit over cash invested, but it is your annual cash flow AFTER reserves divided by cash invested.  $200 per month free cash flow is not too bad, if you are reserving for the roof that needs replaced in 10 years, the water heater that could go in the next 5, kitchen remodels that need done every 15-20 years to keep rents up, etc.  If you are accounting for those types of items and setting aside that money, while still cash flowing $200/mo, I would say you are doing well.  If you are looking at $200/mo by just taking rent less mortgage payments, insurance and taxes, then you will actually be cash flow negative very quickly.  And regardless of appreciation, the goal is to not be spending money each month.

Jon Schwartz · Answer

@Evan Polaski, touché! Cash-on-cash should be calculated on profit after accounting for reserves!

Jon Shoop · Answer

Taxes are high in Dallas county, this is true. But there are some really great pockets throughout DFW and Fort Worth that have lower taxes than Dallas. There is a very high demand for rentals in Dallas. We usually are only able to keep vacant properties on the market for 2-3 weeks before they are rented by great and highly vetted tenants.

Also, Dallas has a higher renter/owner ratio than the national average. With all the growth that is going on and coming to Dallas, I love the strength of long term rentals here.

Also to note is the appreciation. The value of my home in Dallas has gone up 30% from when I purchased in 2015. Can't beat that!

Lucia Rushton · Answer

@Martina Su. I WISH Dallas was at the 2% rule let alone getting 1%. There are lots of overpriced properties with Agents saying they are currently cash flow positive - but not at the ask price. A solid deal is .8-.9% what I call the rent ratio. If you find one without forcing the appreciation at .9% or higher you are onto a winner ( at least in DFW) .

Best wishes.

Jon Schwartz · Answer

Martina, I invest in CA for the appreciation. Appreciation gets a bad rap on Bigger Pockets, but it's the real wealth-builder in real estate. I'm not looking for 2%-rule or 1%-rule properties, though. I'm looking for properties that have a 1% or 2% cash-on-cash; that way, I know there's just enough cashflow for the property to pay for itself while it appreciates. I also looking for properties that have 1-2% cash-on-cash and below-market rents. That way, as soon as I have a tenant turnover, the property will cashflow great.

Good luck!

Jon

Darius Ogloza · Answer

Possibly in Fallujah, Iraq.  Seriously, the opportunities will almost certainly require you to enter D/F Neighborhoods.

Gary Parilis · Answer

I don't like the use of the word "rule" here. It's really just a rough heuristic. it varies based on other considerations. For example, taxes are hugely different from market to market. Rather than looking at rent/price, it makes more sense, at a minimum, to level the playing field by using (rent-taxes)/price.

Will I ever find a property that meet 2% rule?

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