Rental property under the 2% rule

[Leigh Whiting]

So were looking to purchase our second rental property after we cash out refinance our first one but in our area there aren’t any deals that fall into the 2% rule. However, housing market and rental market is great here (west valley area outside of Phoenix). Thinking that as long as the house is cash flow positive we should take the chance and hope that appreciation will pay off in a few years even if we are breaking near even on the rental. Thoughts? Any other investors in Phoenix area have insight? Thanks! 

[Nicole W.]

@Leigh Whiting 

I agree with @Evan Polaski's info. 

I use 5.5% vacancy and 1000 mo reserves (repairs/utilities/pest control/appliances), 8% management (I negotiated this with no lease up fees as I have a few with 1 property mgr/otherwise I figure 10%/you must shop for the best person/company & rates), taxes, insurance and interest. I also make sure it cash flows at the highest and lowest rents in the area. I bought a few in Phx metro which work for me. Just figure in these #s. 

I haven't found the 1 or 2% rules helpful as I have found properties in bad weather/hurricane area or in areas where taxes can really jack up with values going up, and they end up not cash flowing at all. In other areas I found I can go below the 1% and it works out just fine due to low fixed costs. It is relative and involves many factors. I had to go to my own little formula and it works for me.