Arizona Investors! Does the 1% rule work in Phoenix?

Question

I’ve been looking at houses all over Phoenix for the past year and based off of sites such as rentometer, Craigslist and Zillow, houses between $200K - $350K seem to fall well below the 1% rule.  Whenever I do most of my calculations for a property I’m interested in, I end up losing money in almost every scenario.  There are a few where I make a profit, but well below a 10% ROI.

Do I need to take these sites with a grain of salt and charge the fee I want? I would imagine a 3 bed/2 bath could rent for $2K a month anywhere in Phoenix but that’s just doesn’t seem to be the case.

Rent usually ranges from $800 to $1500 and that is usually below my bottom line. At best, I end up making $200 - $300, but I need at least $600. I would prefer to rent for at least $2K a month in cities like Avondale, Surprise, Goodyear and Peroria.

Am I being unrealistic to expect to rent for that much anywhere in Maricopa county?

Account Closed · Answer

@Ibrahim Yamini you will struggle to find something that fits the 1% rule in Phoenix right now without doing some value add work of your own. It’s the hottest market I’ve seen here in over 10 years so the deals are fewer and further between. A typical $300,000 1,500sf home might get you $1500-$2000 in rent depending on condition and location.

Erin Estes · Answer

Many investors are investing for appreciation at the moment.  Projections are promising!  I’ve heard of many investors purchasing new builds as rentals.  We have extremely low inventory in the resale market and demand for both buyers and renters is overwhelming. Obviously, a higher quality product in an ideal location will demand a higher rent price point, but each property should be assessed on a case-by-case basis and not lumped into a whole.  Let me know if you’d like me to look over any of your prospects!

Bob Okenwa · Answer

@Ibrahim Yamini

"Charging the fee you want" isn't always how the market works. The market will determine what price your rental is worth so I'd base the projects off of market data. If you want 2k a month in rent, you need to find an appropriately-sized home in an area where rents are in that range.

George Cocokios · Answer

I’m an investor in the west valley and can attest to the explosive growth in that area over the past few years and there is no end in sight. While you could achieve rents near $2k a month on a 3br in Goodyear, Peoria, Surprise, it all depends on the size and condition and amenities of the home and area. I see rents currently running between $1600 for a small 3br  and above $2000 for larger 3br home. Rents have exploded recently all over Phoenix and I’m faced with having to raise rents hundreds of dollars just to keep pace with market rate! If you are committed to buying, i would not wait too long as prices will continue to rise as will rents. My sources expect Phoenix area home prices to appreciate 25% over the next 3 years

Ibrahim Yamini · Answer

@George Cocokios

Thanks for the info!  My wife wants me to buy OOS and she thinks I only want to buy here because it’s close.

Well, that’s true, but I don’t think she truly understands the value of this neighborhood.  My house literally shot up in value over $130K and there’s neighborhoods being built all around us.

Why would I invest in another state when the market is here?

George Cocokios · Answer

@Ibrahim yamani

The rentals are in Goodyear ,  the sq ft starts at about 1300  for the lowest rent and goes up from there based on size.  My thought is even if you were slightly in the red for now with ROI, the rent increases, tax write offs and paying down loan would quickly net you a profit. Phoenix is on fire right now. Don’t wait to pull the trigger or you will find the competition very stiff as investors are pouring in from all over the world to cash in on the rental craze and the build to rent . Phoenix is ground zero for the BTR trend that is evolving.

Ibrahim Yamini · Answer

@George Cocokios What sq ft and location are these 3/2 houses that rent $1800 to $2000 a month?

@Elizabeth Schartman I use rentometer.com and Zillow mostly.  Craigslist helps you figure out what places are renting for.  I think I got irritated because I wasn’t getting the numbers I wanted.

We are in the same boat.  You just bought your first rental and I’m about to buy mine in a couple months.  I have a clear timeline: 31 August ‘21.  I feel like that will keep me grounded in obtaining my objective.

*Sigh* Based on what some of you are saying, I might have to sacrifice a few hundred dollars a month and trade it for the appreciation rather than focusing only on cash flow.

I guess if I’m still in the positive at the end of the day, that’s still a win I can accept for now since I’m just starting out.

When I gain more capital and experience, my attitude will definitely change and I’ll be able to get exactly what I want later.

Just need to bide my time.  This business is about being patient right?

Elizabeth Schartman · Answer

My experience is similar...this is my 1st property and turnkey...I am cash flowing about $150/mo (after mortgage, prop tax, insurance, 5% for vacancy, 10% for maintenance, HOA and 8% prop mgmt).  I bought in March and have already made back my closing costs and minor repairs in one month's home value appreciation.  When you estimate what you can get for monthly rent, what are you using?  I used zillow and found that they are about $150 lower than actual.  There just aren't enough homes for people who want to live in PHX.

Lauren Cook · Answer

I just picked up a townhouse in Gilbert and it falls below the 1% rule. I bought for appreciation and to hold long term knowing that rents are picking up/values are going up quickly. It was 340k and it rented for $2,000. It was fully gutted and remodeled prior to putting it on the market. The thought is I'm just starting out and didn't want to put 35-40k into it myself.

Arizona Investors! Does the 1% rule work in Phoenix?

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