Does the 2% rule work in high priced markets such as Massachusetts?

Question

Hey guys,

I'm looking for a response from people in high priced markets like the North East and California. My question is, does the 2% rule of thumb, ie rent should be 2% of the purchase price, work for high priced markets like Massachusetts (where I live)? I get responses from sellers looking to sell their SFH and Multi families they have been using as rentals. I try to analyze the purchase price for these properties using that rule and I come up WAY short of what anyone would sell a rentable property for.

If this rule doesn't work here, what are people using instead?

J Scott · Answer

You need to ensure that you're asking the right question so that you can fully understand the answer.  While it's somewhat a semantical thing, it goes to the heart of whether you really understand the underlying dynamics at work...

When you ask, "Does the 2% rule work in MA?" the answer to that specific question is "Yes."  The 2% rule just says that if you can get 2% of the investment price in monthly rent, you'll make a good reason -- and that's true in MA or pretty much any other place.  So, again, the answer to "Does the 2% rule work in MA?" is yes because IF you can find a property generating 2% of the investment in monthly rent in MA, you'll make a good return.

Now, the question you probably mean to ask is, "Can I achieve 2% of my investment in monthly rent in MA?"  The answer to this question is most likely no.  Achieving 2% is possible in some of places, but certainly not all, and most certainly not in high-priced markets (north east, California, etc).

Just because you can't achieve 2% doesn't mean you can't invest in that area. You need to determine what your specific goals are, and it may be possible to achieve those goals even without getting 2%.  Or it may not be.  But, don't attribute too much weight to the whole 2% thing...consider it a wish list goal...

George Paiva · Answer

I am in Connecticut which is basically like Massachusetts in regards for finding a cash flow property.  What works for me is the 50% rule coupled with a GRM multiple for valuation.   I generally figure out Gross Income and Operating income then use a GRM of 6 or 8 to get a sense of value.  In the end you need to vet out all income and expenses and find the deal that gives you the most return.

In my opinion turnkey multifamily in Connecticut will not cashflow.  Need to look at sellers motivation and condition of property and how you can squeeze more value to get market rents and run your analysis on that.  We are experiencing a net loss of "good" population and employment but people have to live somewhere.  So I plan on higher vacancies to fill in unit with higher quality tenants and expect to put some sweat equity into each unit.

Thats how it is here in CT.  Your mileage may vary....

Shaun Reilly · Answer

The 2% rule will generally not work in MA.

It CAN as I have one that worked on (and it isn't in the middle of nowhere) but only that one and it took like 7 years to find one that worked that well.

Usually you are doing pretty well to get better than 1%, which is why MA is often a Dud unless you go bigger multi family or are more interested in appreciation.  I have seen VERY few single family detached houses that would cashflow more than maybe $100 on a $200-400K investment.  If you go with condos and townhouses you can do a little better with, but you still need to get a good deal to get them to work.

Jon Holdman · Answer

It only works well if rents are about $500 a month.  Lower rents need a higher ratio, higher rents need a lower one.

I would recommend you apply the 50% rule (which seem to apply everywhere, unfortunately), put in your numbers for rents, prices, and financing, and compute the returns you can get in your area.  Many, perhaps even most, houses in this country do not make profitable rentals.  You may have to go into an area where you're less comfortable or further away to come up with acceptable deals.

Mike Hurney · Answer

@Will Crocker Doesn't hurt to keep looking. Sometimes we have to kiss a lot of frogs to find our Princess/Prince;-)

Ali Boone · Answer

That's perfect Will! That's exactly what it should be used for.

The 2% rule days are pretty much gone. It's a bummer for all of us. You can still get them, but only really in low-income or sketchy areas. With some exceptions, but for the most part. If you get the 1% rule these days, you're doing good. Although of course depends on what property type you are looking at too. That can make a difference.

Will Crocker · Answer

@J Scott You're exactly right. I did ask the wrong question. Thanks everyone else for the responses. @Ali Boone that article was very helpful as well. I was asking for quick analysis when looking at props to determine if it is something I should look farther into or just move along.

Ali Boone · Answer

That "rule" doesn't work in most places anymore, nevermind the higher-priced markets. It's also not a rule, it's a guideline. I would drop it from your vocabulary for the most part. I think it confuses, and misleads, people more than not.

http://www.biggerpockets.com/renewsblog/2013/04/14/the-2-percent-rule/

Mike Hurney · Answer

@Will Crocker I look at this as an Appreciation market (not CashFlow) if you're Buy and Hold.

Brian Ortins · Answer

A market to research for achieving 2%, is Worcester County.  I have found many multifamilies that achieve 2%, but I will disclose that I have not purchased any in that county, and have not completed my market research before buying.

Does the 2% rule work in high priced markets such as Massachusetts?

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