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Updated almost 17 years ago, 01/23/2008
There is no way
That purchasing an SFR for $170,000 (68% of 250,000 ARV-repairs) will come even close to $3400 a month as a rental. I just don't see it happening in CA. Anyone living the 2% dream here?..Am I looking at it wrong? I'd be grateful for any clarity.
Don’t know the CA rental market… but that does sound high.
The 2% rule applies in areas where nobody wants to live, like OH.
If you want to invest in California, or any other place on the west coast, you are going to have to forget about the 2% rule and fiigure out a diferent way to make money with real estate.
Be aware that the figures that lead to the 2% rule are valid. It is quite expensive to maintain rentals, and if your rent money isn't going to cover those costs, you need to know where the money is going to come from.
You can make a lot more money in real estate in California than anyone else will ever make in OH, even if they work it for decades.
California might not yet be done with falling prices, but they've come down enough to at least be following the market closely and looking for opportunies. If you are serious about making money, you buy when prices are low.
Originally posted by "**********":
They need tax write offs and have no problem operating in the red.
.
I am not familar with investment strategies that loss money on purpose.
Is there truly a net gain by lossing money each month?
Well I'm not sure I have clarity yet but thanks for the replies. I wonder if the whole operating in the red thing is a trade secret though. Is there any better explanation?
Gary
Some of you guys want to see how you can make money on negative property?
How about bare land? There is no income at all. You can't get too much more negative than that.
Yet, you buy a parcel for $1 million at the edge of town, 2 years later, a super Wal-mart goes in next door, and you sell for $3 million to Lowes.
I know it isn't 2% cash flow, but it is enough for me, and it's been negative cash flow every month for 2 solid years.
The investors who absolutely must have the 2% rule wouldn't have touched that. For all I know, you couldn't invest like that in OH. But that's how you invest on the west coast.
PNW,
Yes, that would be a GREAT deal - no doubt about it. However, that's not what we're talking about here. What we're talking about is the rental business.
Buying something and hoping for appreciation or buying something and hoping that a major retailer will buy it at a later date is speculation. That's an entirely different business.
The 2% rule is just a simple mathmatical screening tool for determining the maximum purchase price for rental properties that will cash flow. It has nothing to do with speculating or buying for future appreciation.
Mike
Originally posted by "PNW":
Yet, you buy a parcel for $1 million at the edge of town, 2 years later, a super Wal-mart goes in next door, and you sell for $3 million to Lowes.
I know it isn't 2% cash flow, but it is enough for me, and it's been negative cash flow every month for 2 solid years.
The investors who absolutely must have the 2% rule wouldn't have touched that. For all I know, you couldn't invest like that in OH. But that's how you invest on the west coast.
MikeOH is correct. The theoretical given is pure speculation and I would say improbable that the market would be that inefficient. Someone could buy at $1 million piece of land and turn it around in 2 years for $2 million? Something is missing here. To good to be true.
Investing is a different story and looking at the numbers DOES matter. Is it that properties that meet the 2% "rule" don't exist in CA? Or is it that these so called "investors" don't know where to find them and how to buy them?
The difference is risk. Any real estate strategy carries some risk, but in these cases:
1) The 2 percenters run the risk that rents will not increase down the line, but other costs (notably real estate taxes) will. It may also be harder to find tenants down the line. If the prospective tenants go down and the costs go up, you value of the property will go down. Note the earlier poster's comment that the 2% rule works in distressed areas.
2) The "buy negative cash-flow and wait for Wal-Mart" people take the chance that Wal-Mart might decide to locate on the other side of town - which would leave your side of town empty and bare (and cash-flow-less).
I live in the Bay Area, where properties are very expensive. It's rare to find properties with positive cash flow, the rule MikeOH uses, $100 per unit, good luck finding one. The rule I follow out here, properties must generate enough rental income that can cover the mortgage. Many rental properties are over value, can't even cover the mortgage. I don't expect positive cashflow until a few years later. Rental income out here is pretty good, I had some furnace work done, the guy noticed I was renting out my 1bed/1bath, he ask how much, I told him $1250. He was like wow, that pretty good, his house he rents out in Los Banos which is 2 hours away from the South Bay, rents out for $1100. I live in the Silicon Valley, where there is plenty of high paying jobs. Most people who live far away have to commute to Silicon Valley because jobs in there area just don't pay enough.