1% Rule in Louisille Kentucky? How possible and where?

Question

Hello everyone,

I've been researching many properties in the local area and curious what areas everyone is looking to buy into for a buy and hold?    I have had a few deals come up in J-Town and Fern Creek that even at a low cost and adding necessary rehab, the rents will not get to 1%.    Anyone have any suggestions on areas to focus on?   Or, perhaps, and more than likely, I have just not found anything worth buying yet.

While I like J-town, Hikes Point and Fern Creek because I grew up around those areas, I realize that those may be more difficult to get near 1% than say, in the west end or other areas.

Anyone with some tips on areas and perhaps where they have been able to hit on the 1%-2% rule of thumb on rent.   It just never seemed like rent in Louisville was very high compared to property values over the years as I've minimally been looking around.

When I listen to the podcasts and listen to the guys talk about filling out the online calculator using $60,000 property and $1000 rent from their areas, I haven't come across that.   Wondering if anyone locally has and where I may be able to focus on looking to achieve a cash flowing property.

Thanks

Erik Hitzelberger · Answer

My Rule of Thumb is that Rules of Thumb are foolish and should be avoided at all costs.  You buy a property because it meets your goals.  Your goals are likely different from mine or anyone else's.  They may even change as you age and experience different life events.  There is no Rule of Thumb for Life.

If you have a full-time job that you don't intend on leaving and you are acquiring homes for retirement in 20-30 years, you may take less cash-flow now in exchange for fewer management issues and/or better 'expected' rent and property appreciation in the future.  If you are going to manage the properties yourself and you value your time, you may choose to buy in an area that's closer rather than across town.  If you are looking to maximize cash flow and don't care about the extra management or property appreciation, you can find that too.

The first step (if you haven't done this already) is to determine your goals.  Ask yourself, "why am I doing this?"  "Are my needs immediate or for some time in the future?"  "How much time can I really devote to REI?" and so on.  Second, you can set targets for 1) number of homes owned, 2) monthly profit now and in the future, and 3) the amount of time you want to put towards this.  Once you understand this, the type of property / location will naturally fall-out.

At that point, the only thing left to do is make sure you are analyzing the deal properly.  For buy and hold properties, this means including debt service, taxes, insurance, management, and reserves for vacancy/maintenance/repairs.  Simply take the rent subtract these factors and see if the remainder meets your profit target.  If it does, it's a deal!  If not, it isn't.

Major Robertson · Answer

All these guys are giving fantastic advice. However I'm in Old Louisville with a 200k, 5 bedroom house and I'm close to the 2% rule AND I bought off the MLS.

It can be done.

Kevin Nalley · Answer

Here's a good place to start...

http://www.jeffcomm.org/

Clay Smith · Answer

In Louisville I see 2% on 40k houses and 1% on 120k houses. In between is a sliding scale. You go past 120k and you get into Flip territory. The neighborhoods you mention are 140k to 180k houses and those are harder to get 1%.

Wether you buy turnkey or rehab yourself can impact a % based rule as well.

NOTE: There are always exceptions I am obviously generalizing our market.

Jared Yates · Answer

@James Beam I've been looking around the Okalona / Newburg area and having the same issue. I'm just getting started, but from what I can tell the kind of cash flow and rent they talk about in a lot of the articles on here and in the podcasts just isn't feasible in Louisville.

That being said, @Erik Hitzelberger has a really good point. As I get to know the Louisville market I'm realizing that a lot of the preconceived ideas I had just (2% rule for example) just don't work here. Of course, I could just not be finding any deals either! lol

Anyways, look for deals, run your numbers, and stick to your plan. Best of luck and feel free to get in touch if you ever need anything :)

Clay Smith · Answer

Here is a link to the properties I own, you can see where I invest.  My Properties

Kevin Nalley · Answer

@James Beam,   I personally think Shively, Beechmont, Germantown, Hillview, Okolona, are all good rental areas.  I was talking with Jeanna Ashley (VP of River City Bank) a couple weeks ago and we discussed what she thought was a good price range for rental homes, she confirmed what I already knew... under $100k (Single Family Homes) tends to be the sweet spot in our area.   As many have mentioned, the numbers have to work, and like Clay, I tend to use rent-o-meter as my guide if it's an area I'm not real familiar with.

Clay Smith · Answer

I use rent-o-meter to make sure they are in the right range. Seems doable. There aren't many places I don't like anymore. I can honestly say I would buy a house anywhere in a 1hr driving distance. I care more about the assets time, cost, and long term outlook than the location. I would buy on 22nd street next toa dead body if it cash flows.

However, I assume you intend to self manage your rentals. Therefore, you are in better than most given the 80k arv.

Seems the best blend for me is a 60k arv rental. Just cheap enough to self manage and rents good enough to pocket some cash even when fully leveraged.

James Beam · Answer

Thanks @Clay Smith @Kevin Nalley and everyone for the info!   What do you guys think of areas like Okolona (40219), Hillview (40229), or even Newburg/Rangeland (40218 I believe)?    I'm also very familiar with those areas and have been able to find a few that looked doable for buy and holds there...  I have seen some sell in the $45-$60k range that have ARV in the $85k range.   Little 1000sf 3/1 on a slab, or perhaps even a basement...

Do you think a 3/1 in those areas fetch $800-$850 or is that being too optimistic?

Thanks again!

Wes Singleton · Answer

I'm new to investing as well, but I think in Louisville you can find several properties at the 1% rule mark in decent areas.  For me, cash flow is my main goal, so I would need more than 1%.  Will you be able to find houses at the 1% mark in St. Matthews, Highlands, Germantown?  I'm finding the answer is no, unless you buy a property at foreclosure or you entice someone to sell through yellow letters and the like.  But on the MLS, there is simply no room for investors in those high appreciation areas.  My strategy is to go after the "B" neighborhoods, where the margins are better, but hopefully not as high maintenance as the west end.  An example would be certain neighborhoods in Valley Station, PRP, Beechmont, etc.  If you are open to multifamily, there are several properties in old louisville that meet your 1% rule, but those 100+ year old buildings bring with them other challenges to keep in mind.   As I said, I'm new to the game as well, but these are my observations on the louisville market.

1% Rule in Louisille Kentucky? How possible and where?

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