Can't find properties meeting the Rule of 2% (or Rule of 1%)

[John Williams]

I'm considering a jump into residential real estate as an investment opportunity and have read about the Rule of 1% and Rule of 2% (i.e. monthly rent should be 1-2% of the property price). I understand they aren't necessarily "hard and fast" rules, but based on my financial modeling, I won't reliably generate cash flow unless I land in that 1-2% range.

If my understanding is correct, I'll need to find a property with a Price-to-Rent Ratio between 4.17 and 8.33 in order to meet the Rule of 2% or 1%, respectively.

Rule of 1% requires Price-to-Rent Ratio below 8.33

Rule of 2% requires Price-to-Rent Ratio below 4.17

I've downloaded Zillow data to calculate the Price-to-Rent Ratio in various areas (searching my city and those nearby). I have barely been able to find any zip codes with an average Price-to-Rent Ratio below 10.

What gives? Does this indicate that the market just isn't ripe for a cash-flowing property that meets the Rule of 1% or 2%? Or do I just need to look harder to find the diamond in the rough? 

[Nathan Gesner]

I'm in a market where the average single-family home is $255,000 but it rents for $1,500. A four-plex of 2bed/1bath apartments sells for $350,000 and brings in $2,700. Neither of these meet the 1% rule.

In the last two years, I've purchased 20 units that all meet the 1% rule. I am about to buy two more. I'm able to do this by watching the market closely and knowing what constitutes a good deal. And I save up the funds available to act quickly when a deal is found.

It seems to me you can typically have cash flow or appreciation, but not both. If you buy something in San Diego, you won't cash flow but you may get some phenomenal appreciation. The problem is that nobody can predict depreciation so it's more of a gamble, particularly in a state like California where a governor or City council can destroy the market with their heavy-handed regulations. If you buy in Memphis, you can get some good cash flow but the appreciation may be minimal. I am constantly considering other markets, but I like the stability of my local market and the appreciation it brings. I also believe we're poised for significant growth in the near future as people start to escape the heavily regulated states. If I can be patient and find cashflowing properties locally, I have a pretty good chance of hitting cashflow and appreciation