Do you use the 2% rule in Twin Cities area? 1%?

Question

I’m new to real estate investing and just in the information gathering stage, I’ve been reading BP Rental Property investing and am reading up on “the 2% rule” or making sure that a properties monthly rental income is equal to 2% of the purchase price or greater.

I understand that this can be a different number for all markets, so I’m curious if there is a number you use in the Twin Cities area? What number has proven to cash flow well?

Noah Chappell · Answer

@Alley Carlson welcome!! Unfortunately you're more likely to catch a pterodactyl with a pokeball in NE Minneapolis than find a 2% deal.. just don't exist, never on the MLS, and very rare to find an off market owner who doesn't know the value of their property, unless they've lived out of state for years under a rock. That's not to say you can't be successful in this market, as Daniel and Jordan have said, you just need to have imagination. With rent/price ratio, use your projected rent, and use your total purchase price + repairs for price. If you do that and can get a 1.35 or 1.4% deal, I'd say you'll likely hit your goal of $150-200/unit/month. I think that is totally possible. Do reach out if you'd like some ideas on areas to look.

Corey Hawkinson · Answer

@Alley Carlson Welcome from another Twin Cities investor. I don’t like saying it depends... but it depends. Even within the twin cities metro you can’t apply the same rule to North Minneapolis that you would apply to Edina.

Personally, I focus on the 1% rule as a starting point. That works for the properties I’m looking to buy which are small multi family properties within the metro but outside of Minneapolis and St Paul. That also factors in what I would do to manage the properties.

However, you’ll also find many investors who operate below the 1% rule in higher end properties that are making far more money than I am. So it’s really tough to put an exact rule in place.

More importantly, what types of properties are you looking at? What areas within the Twin Cities are you considering? Those questions are more important to ask yourself and then run numbers to see if it makes sense to purchase.

If you’re looking at North Minneapolis you’ll need to be closer to 2% to factor in additional repair costs, vacancy (including non-payment), etc. If you’re in a higher end area you might only need 0.7% to achieve the same positive cash flow that North Minneapolis gets to at 2%.

Isaac Larson · Answer

I agree with everything Corey said.

In the current market climate, for small multifamily properties in desirable areas, it's becoming harder and harder to find properties even at the 1% rule.  Although I'm not as familiar with the less desirable parts of town, I'd even be surprised if you could find 2% properties there.

In the areas you're looking, I think 1% or very close can be achieved, but you need to "make" a 1% property.  Finding something that needs work, is poorly marketed, turning tenants and raising rents, or has potential to add bedrooms are some examples of what I mean.

Its doable, just takes some extra effort :)

Bruce Runn · Answer

It's an age old problem of everyone would like to find a turn key property at a fixer upper price.  With all the information available now days, you have 100's of people looking at every property.  I recently posted a lot for sale, and had 100's of views in the 1st 2 days.  Now an empty lot is a very specific kind of property that wouldn't appeal to the average investor so to have that many people view it is a little crazy.    I bought a duplex 2 months ago that had 35 showings in the first 2 days and 8 offers by the weekend as it was priced pretty competitively and in a super great location in Uptown.  Anything close to a deal gets an amazing amount of interest as some of the realtors can probably share.

Jordan Moorhead · Answer

Pay attention to the dates of the information you're consuming. 2% rule has been dead since around 2014, 1% is hard to hit now in most markets but deals can still work well around there.

Daniel Anshus · Answer

I would say if you are looking at duplexes and multi-family properties in NE you are not going to find the  2% and  1% won't happen on the MLS. Those deals are found off market or you get creative with adding value to the property. I.E extra bedrooms, finishing space, renting out storage space/ garage. But with that said REI is fun and such a  great way to invest your money. Message  me and lets chat about REI!

Daniel Anshus · Answer

@Collin Barker That's absolutely right. You have to get creative in markets like this (especially NE), renting by the room is a good way to be creative without adding money to the property to build extra bedrooms or another value add opportunities. I would say be careful with the SFH conversion idea. I say this because although  zoning in Minneapolis has made it easy, the building codes have not. I know an investor doing this type of conversion in NE right now  and the city is absolutely killing him on it. Last time we spoke  he said he might quit and make it an ADU instead of an actual duplex.

Bruce Runn · Answer

@Collin Barker

DM me your e mail address and I'll do an introduction to someone doing the exact thing you are talking about.  He bought a duplex and is finishing the basement into a 3 unit as a triplex conversion.  I'm sure he's willing to talk through it as you have to know the idiosyncrasies and be able to execute going from IRC (duplex) to IBC (triplex) in the building code

Collin Barker · Answer

@Daniel Anshus, thanks for bringing that up - good to know. Regarding Auxiliary Dwelling Units (ADUs), don’t you have to live in the building to rent it legally or am I understanding that wrong? I am currently living in a duplex that has a third illegal unit and I’ve been planning on renovating it and making it a legal triplex, but if I made it an ADU instead, wouldn’t I no longer be able to rent the ADU after I move out (I plan to live there 2-3 years)?

Collin Barker · Answer

I live and invest in NE Minneapolis, a somewhat desirable area, and haven't seen a 1% rule deal on the MLS, granted I am also a rookie. However, you can still find properties that will cash flow, it just may require some creativity. If I was a contractor or handyman, I would be looking at SFHs that are good candidates for duplex conversions. I have a SFH that I rent by the room and it's a lot more work as a landlord, but if I have 3 of 5 rooms filled I am breaking even month to month and if all 5 are filled I am cash flowing $1000+/month. I think a lot of investors would see this house and see a SFH that costs $300k and would only rent for 2k/month and move on without a 2nd thought.

Do you use the 2% rule in Twin Cities area? 1%?

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