Cambridge, MA · Member since 2017 · 42 posts · 6 votes
Seems impossible to get 1% in booming cities like NY, Boston and San Francisco... in Boston you are lucky now to get 1/2%. Maybe with development you can get 3/4% but its hard. I often think about the places that get the 1% or more and feel they are a lot more work and with very little to no appreciation. The appreciation you gain in just a few years in one of these mentioned cities may equal the total "bonus" cash flow you get renting out a 1% rule home for 10 or 20 years?. If this is the case I don't see the sense. what I do see is that not everyone has the money to buy "big" in places like In Boston which 500k is a purchase price starting point and although you just get your 1/2 % your making a killing on the short term appreciation. For areas far outside the city (the 1 % or more places) your starting point can be only 50k or so and your pulling in that "bonus" cash but it seems like so much more work, more/tougher tenants, more reno etc.... Just my guess.. .curious what others think?
I always laugh when I read posts about investing this way or that way being "the" way and I admit I do the same.
The reality is it depends mostly on the each investors initial financial situation and their goals in investing.
Some invest as a means to earn a income, others invest to grow wealth. Those starting investing for income need monthly positive cash flow to put food on their table to feed their families and pay for their investment. They do not have deep pockets to supplement a tenants rent or to buy cash flow with their own money. Why would they pay cash in advance to generate monthly income, seems counter productive. If they already had the cash they would be investing to grow wealth. They depend on cash flow to pay bills and grow wealth simultaneously , all be it slowly.
Those starting with the goal to grow wealth can invest in over priced areas where descent rent to property price are unattainable. They can pay cash to create the image of cash flow and supplement that cash flow out of pocket since income is not necessary to support their life style. They already have a sufficient level of wealth to afford this option while speculating on appreciation. In areas where appreciation is historic the level of speculation is minimal, the ability to grow wealth almost a certainty. When buying groceries is not their goal in investing why mess with table scraps in the form of positive cash flow.
Is there a right way and a wrong way, a good way and a bad way. Obviously not since the method chosen is specific to a individual investors perspective, needs and goals. To disrespect one method over another is hypocritical. I have in the past, and likely will in the future, be hypocritical.
However both options for investing (only two of many) have the potential to achieve their personal goals. Both are investing their right way.
@Mike S. If you want to invest in Massachusetts, look south.
The South Shore and South Coast are FAR more affordable and still have high demand. The crazy prices in Boston are driving buyers and renters further out.
On the South Shore, I frequently see 1%. On the South Coast, I've seen 1% -2%.
They're out there. You just need someone like me that knows where to look!
Why worry what the 1%, 2%, 50% or whatever % rule says? They are at best, poor guesses...and don't tell me, "they're not rules, just tools to tell you if your should follow up on that property". Either the deal works or it doesn't, and it has nothing to do with these "milk rules".
Do the math. Don't be lazy,...yes lazy.
If you're analyzing individual properties, you're doing it wrong anyway. You should be analyzing markets to find the ones that have an abundance of properties that match the property profile dictated by your financial goals/needs.
Learn how to have your money "enter/exit" properties other than traditional flip/hold options. Learn how money actually works, and it has nothing to do with these "milk rules". In the end (actually, right from the start), these rules will work (lucky), or either:
1 - Point you in the wrong direction, wasting time (or money if you end up doing the deal)
2 - Restrict you from anything other than traditional flip/hold options, since these other options are not part of the lazy analysis, losing profits that you never knew you lost.
Just for fun, a while back I ran a number of my deals through the 1%, 2%, and 50% guess formulas...kind of a "milk run", with varying results:
1 - They told me not to invest, in deals I made a killing on
2 - They told me to follow through on properties my analysis told me to run away from.
....and both of the above happened more than even I would have guessed.
Learn to analyze markets, then properties within those markets when they match "your" profile for need, and you'll be much further ahead...and waste a lot less time.
Joe Villeneuve you provided an interesting answer! A follow up question I have is, for a new investor, what are some resources we can use to analyze local markets? Is it as simple as just reading articles on the housing market of a particular area? Or are there places where the information is more organized?
What works good for others deviate from the hypothetical suggestions.
Here in Northern CA, most investment properties is in cash, with a mortgage is always negative. Most want to invest close to where they live. The home prices here are solid and as long as the return with cash is higher than money market or CD investors are happy to bank their money near home. Average gross income is $2450 a week per worker. With that being said, since 2010 the home appreciation has been consistently over 11-15% each year. In 2017 it is another 11.5%. That is ~$115,000 equity gained in 11 months assuming one paid for a modest home for 500K a few years ago and is worth $1M today.
Granted one can scatter their hoard elsewhere. Get 2% more in state A and lost -3% unrented in state B... That is their choice to invest in low priced states.
Joe Villeneuve you provided an interesting answer! A follow up question I have is, for a new investor, what are some resources we can use to analyze local markets? Is it as simple as just reading articles on the housing market of a particular area? Or are there places where the information is more organized?
It's all about the numbers, with "$$$" in front, to the REI. Most articles include only the data that supports the writer's conclusions. This doesn't make it a bad source for info, just a "one sided view". You need to learn how to take all the number$ and do your own analysis. You can use almost any listing source that gathers:
If initial rent to price ratios had anything to do with total profits Baltimore and Detroit as examples would the most valued properties investors could own.
There was a guy who just got his mba in real estate and mentioned he had never heard of this rule. Guess what...it is not a rule nor is it a reliable way to understand future total profits. Thus not found in any textbook or taught in any accredited institution.
To be honest with you, I have never used the 1%, 2%, 50% rules.
I use other data to analyze my deals.
Like @Joe Villen, three of the main data (plus other more data) I use to analyze the deals are :
1. For sale listing price
2. Sold comp
3. Rental listing price
4. Plus others data like loan interest rate, loan ratio LTV etc etc.
...
5. But not using 1%, 2%, nor 50% rule
1 percent rule is just a good starting point. It shouldn’t make or break your decision. I’ve done one percent deals and I’ve done two percent deals. The two percent is more work but cash flows more. The 1 percent deal is extremely passive, probably about as passive as you could be in rentals. The two percent deal requires more time.
It’s all about your goals.
Please forgive me if I’m wrong (most likely wrong).
I’m not trying to attack, just my thought for a long time.
I saw many post on BP saying using 1%, 2% rule.
Maybe it really work in some cities that I’m not familiar with.
However, in the cities I’m focus on, Bay Area California and Las Vegas. I cannot find any deal that meet the 1% rule. Therefore, sometimes I ask myself, are the 1% or 2% rule spooky? That people try to make you not to buy any property? (So they have fewer competitors to compete buying houses with them.)
If I follow the 1% rule, I would have zero property instead of 48 properties now.
Therefore, I have never used the 1% rule. I use other data, to analyze my deals.
This thread is just another appreciation vs. cash flow topic.
Appreciation is not a play limited to the coasts. Seeing my wealth increase hundreds of thousands of dollars due to appreciation in interior locations has shown me that.
Everything outside of California and the east coast is not a ghetto Detroit neighborhood with D class tenants and negative appreciation. That is just ignorant.
I always laugh when I read posts about investing this way or that way being "the" way and I admit I do the same.
The reality is it depends mostly on the each investors initial financial situation and their goals in investing.
Some invest as a means to earn a income, others invest to grow wealth. Those starting investing for income need monthly positive cash flow to put food on their table to feed their families and pay for their investment. They do not have deep pockets to supplement a tenants rent or to buy cash flow with their own money. Why would they pay cash in advance to generate monthly income, seems counter productive. If they already had the cash they would be investing to grow wealth. They depend on cash flow to pay bills and grow wealth simultaneously , all be it slowly.
Those starting with the goal to grow wealth can invest in over priced areas where descent rent to property price are unattainable. They can pay cash to create the image of cash flow and supplement that cash flow out of pocket since income is not necessary to support their life style. They already have a sufficient level of wealth to afford this option while speculating on appreciation. In areas where appreciation is historic the level of speculation is minimal, the ability to grow wealth almost a certainty. When buying groceries is not their goal in investing why mess with table scraps in the form of positive cash flow.
Is there a right way and a wrong way, a good way and a bad way. Obviously not since the method chosen is specific to a individual investors perspective, needs and goals. To disrespect one method over another is hypocritical. I have in the past, and likely will in the future, be hypocritical.
However both options for investing (only two of many) have the potential to achieve their personal goals. Both are investing their right way.
It is a fallacy that income and appreciation are mutually exclusive. Equally fallacious is the notion that class A and B areas will always appreciate. You could purchase a monthly loser hold it for 10 years at a carry loss than sell for less than you purchased, particularly after paying RE agents, title fees, and lawyers.
The vaunted 2% rule always comes back into discussion.
1%, 2%, doesn't matter. It may serve as a way to compare cash flow in various markets to other investors but thats about it.
Ultimately, the original post really seemed to be more making the point that they didn't see how to make money in some of those big cities. And to that I would say he's right.
I don't see how people make money on 500k houses that rent for 3k either. It does become more of an appreciation play at that point. i.e. They're ok losing money on rental income because they're convinced they will make way more on appreciation. And that is a model that I'm sure has made a lot of people in the high end areas a lot of money.
The risk with that model though is that if you buy and you hit a downturn in real estate, those areas can lose a lot of money too. So now you have a house that is way underwater and that you're losing a couple hundred bucks or more a month every month. At some point, then you just decide to give up and let them go back to the bank because you think investing in real estate doesn't work.
And thats why most investors - when giving advice - tend to suggest you buy deals that cash flow. Then even if you buy it and the prices drop, you still have positive cash flow to hold it so you're not really opening yourself up to as much risk. What do you care what the price of the house actually is if you're making money on the rent? The tenant is paying down the mortgage and eventually the house will be paid off.
To me, I would just start looking further and further out from the bigger cities. I'm about 50 miles south of chicago so I'm not what would even be considered in the suburbs of chicago. These are really just the suburbs. Small towns (15k or less in population) that all kind of run into each other or are within 5 or 6 miles of each other.
Whats nice is that you have far less deeper pockets in these types of areas because its harder to scale so there are still some opportunities down here. And that would be where I would tell you to focus. Here is what I would look for: 1) Run your numbers as if you could buy the homes in the area at 70% ARV. So purchase price plus rehab would be 70% to 75% of the appraised value after your rehab is completed (after repair value).
2) Estimate the rents.
3) Estimate your PITI based on a mortgage of the purchase and rehab cost (i.e. 70 or 75% of the ARV) and then target a gross profit that you think makes sense. For me that number is 400/mo. I want a gross profit of 400/mo or more on rents of 1,300 to 1400.
Maybe you adjust that up or down a bit and say that if your rents are 2,000/mo, then you'd want gross profits of 500/mo. Or if rents are 1,000, maybe 350/mo.
But that would be how I'd try to identify areas that might work.
I'm sure there are profits on the higher end that might make sense at 80% ARV but I'm trying to put something general out there.
So my advice: 1) Stay in smaller to medium size towns with good schools 2) Find areas where the number work so that if you can get a deal at 70 to 75% of the ARV, you'll end up with a gross profit of roughly 400/mo assuming that you can get a mortgage at 100% of the purchase and rehab (i.e. 70 to 75% of the ARV).
fyi: Ultimately, I'm a believer that you can find deals at 70 or 75% of ARV in every single market out there. I say that because there are flippers in every single market out there and thats pretty much where I believe they'd need to be in order to make the returns I think they'd want to make. But I also believe its easier to find those types of discounts in the smaller towns out there.......
Rules are made to be broken . What works for 1 person may not work for another . Sometimes after you run the numbers you just have to go with your gut feeling
I can't pull off a $500K property, especially one that has negative cash flow. If I could I would have some small apartment buildings by now. It doesn't matter how good an investment is if you don't have the money to pull it off.
You have made some assumptions. They could be well educated assumptions but they are assumptions none the less.
Transaction costs are very high in real estate. Buying and selling based solely on appreciation usually does not work short term. Yes some areas like California and Boston have high long term appreciations rates but I have seen serious real estate crashes in both.
My rentals are all in Baltimore city. I have a small portfolio so it could be just good luck but my tenants have been very good and modest work. I suspect renovation costs are higher in CA especially $500K neighborhoods.
Quoted from @Adam M. and others have said similar things in other threads. Yes sometimes that can be the case but again it is an unfair assumption to think that is always true. It certainly is not true of my properties.
I will add another factor.I am making an assumption here and I'd like to know from others with experience in higher value - higher appreciation markets. I suspect in high demand expensive markets it is tough to get properties substantially below market value. In my market I can get properties as low as 25% of "As Is" market value, building instant equity. I don't have to wait for appreciation. I suspect I would not be able to do that in a competitive CA market.
@Thomas S. really hit the nail on the head. Everyone invests with different goals, and thus different properties and markets will suit different people.
To expound on that, while the writer is using data to support their conclusions, you need to be careful of seeking out your own confirmation bias....seeking out and only relying on the information that supports your presuppositions. 99% of investors, in any investment vehicle do this.
This thread is just another appreciation vs. cash flow topic.
No it isn't.
Appreciation is not a play limited to the coasts. Seeing my wealth increase hundreds of thousands of dollars due to appreciation in interior locations has shown me that.
100% true
Everything outside of California and the east coast is not a ghetto Detroit neighborhood with D class tenants and negative appreciation. That is just ignorant.
...and not everything in Detroit is ghetto...that too is a very ignorant statement. Some of the wealthiest people in the USA live there, and if you knew your markets outside of the west, you'd know that two of the highest and fastest appreciating areas in the USA are in fact within the Detoit city limits.
Seems impossible to get 1% in booming cities like NY, Boston and San Francisco... in Boston you are lucky now to get 1/2%. Maybe with development you can get 3/4% but its hard. I often think about the places that get the 1% or more and feel they are a lot more work and with very little to no appreciation. The appreciation you gain in just a few years in one of these mentioned cities may equal the total "bonus" cash flow you get renting out a 1% rule home for 10 or 20 years?. If this is the case I don't see the sense. what I do see is that not everyone has the money to buy "big" in places like In Boston which 500k is a purchase price starting point and although you just get your 1/2 % your making a killing on the short term appreciation. For areas far outside the city (the 1 % or more places) your starting point can be only 50k or so and your pulling in that "bonus" cash but it seems like so much more work, more/tougher tenants, more reno etc.... Just my guess.. .curious what others think?
Too many generalizations. There are lots of ways to make profit in real estate...at both high and low GRMs (and anywhere in between). Appreciation plays can be predictable and cash flow plays can be low maintenance. My-way-or-the-highway strategy is rampant on BP...and anyone who tells you so is just explaining their limitations, not yours.
What if I told you... ready... that you could meet in the middle. You could set standard analysis metrics like all the finance people on here and also use the % rule to supplement those analyses like everyone else!
Team work makes the dream work,
Tommy
Please forgive me if I’m wrong (most likely wrong).
I’m not trying to attack, just my thought for a long time.
I saw many post on BP saying using 1%, 2% rule.
Maybe it really work in some cities that I’m not familiar with.
However, in the cities I’m focus on, Bay Area California and Las Vegas. I cannot find any deal that meet the 1% rule. Therefore, sometimes I ask myself, are the 1% or 2% rule spooky? That people try to make you not to buy any property? (So they have fewer competitors to compete buying houses with them.)
If I follow the 1% rule, I would have zero property instead of 48 properties now.
Therefore, I have never used the 1% rule. I use other data, to analyze my deals.
I'm curious: were those properties bought using 75% borrowed money (ie. like "normal" investors have to cope with)? If not, just where was your cash coming from to start with? And if so, how do you afford the negative monthly cash flow? Just askin'...
Awesome response everyone and thanks so much for them!
@Thomas S.The reply from Thomas was EXACTLY what I was looking to hear.
Side note: as This is a different topic on cashflows and It maybe I'm checking the wrong areas outside of Boston but...
I've read a lot of people talking about buying 50 - 150k properties using a 1% rule to generate cash flow... its just seems scary to me at least where I am. Around 300 dollar monthly cash flow after JUST PITI on a 150k house (75%ltv) leaves me with 3600 a year for repairs and maintenance. Holy, that is scary w/the renovation costs in New England that can easily swallow that cash flow...I will have to live really close by and do all repairs, maintenance, mgmt my self.
When I get up into the much more expensive properties that produce nice cash flow they seem to make more sense generating monthly 4k cash flow (after PITI but before maintenance and repairs) on a 700k multi (but its commercial, so commercial loan!) BUT now your needing a big down payment here because the much larger purchase price... so maybe you don't need that cash flow after all....idk...maybe you do.
Virtually the only thing is non rule could be pratically applied for is comparing like properties in the same locations ( maybe even same street) and then it might reveal only the initial cash flow ratios in those same locations with same type properties.
To use this rule like BP preaches is nonsense when comparing to other locations as if all the factors were the same. It is also a bit redic I even would have to make such a post on an established REI site.
