How is the 2% rule realistic in a market like Seattle's?

Question

Hi all! I am pretty new to BiggerPockets. A friend introduced me and I have been listening to a podcast a day, reading Rich Dad, Poor Dad, and reading tons of these discussions. What great content! I am also new to investing and starting the very beginning stages of learning, in every aspect.

I will take this first forum post to say a little about me: I am 24 and work/live in Seattle. I have a full time job where I make an above average income for Seattle. My wife and I just bought our first home in West Seattle through a family deal (my grandmother is selling us one of her rental properties) that has a 100 year old house on it and 4000 square foot lot of LR2 right on California Avenue. She sold it to us for around 175k under value and we are stoked about the potential of this property. We had saved up a good chunk of money to put down on the house we were going to end up buying to live in and thankfully since this deal came along, are not having to put a penny down on this house because we are doing a gift of equity loan purchase (while still avoiding PMI). I am not ready at this stage of life/experience level to take on a development project on this property (but definitely someday), but would really like to continue to learn more of how to invest into other properties to hold/rent specifically in the Tacoma, WA- Seattle, WA area. My grandmother, totally uneducated about real estate, invested her pennies wisely into real estate buying properties from about 1970-1995 and now is a millionaire in assets. I want to follow the same example.

Through my research I have been finding that everyone has a different formula to evaluate properties. It seems one of the more simple and commonly used ones is the 2% rule (meaning if you buy a house for 100k, you should be renting it for 2k per month). To me, this seems completely unfathomable in a market like Tacoma or even more-so, Seattle. Even at auction, (which of course comes with its risks) Tacoma 3/1 houses are selling for 80k-120k and needing 25-40k put into them and renting for around 1500 per month. Already rehabbed 3/1 - 3/2 homes are going for around 170k-250k and renting for 1200-1800 per month. Either way, the 2% rule seems unrealistic. I have heard people mention the 1% rule and even that seems hard to do. What do you all personally use for your formulas? For those that live in or around Seattle: is it possible to find these 2% deals? Are they all huge rehab projects?

All input is appreciated! Thanks, all!

Andrew Syrios · Answer

Short answer; it's not. Here's my rundown on the Godawful 2% rule: https://www.biggerpockets.com/renewsblog/2015/05/06/2rule-die-horrible-death/

Account Closed · Answer

@Jacob Wyatt go West Seattle!! I'm right up the hill from you just above Lincoln Park.I invest up the road in Everett where I use the 1% rule for a very quick rule of thumb. If proforma rents can make the 1% rule the property is worthy of more research.

Catherine German · Answer

I think if you are really lucky you can find 1% or more in Pierce Co. but depends on the financing you get. If you have cash you can do it no problem in Tacoma but you have look around for the deals. Some of these homes which have recently been quickly flipped are really over priced right now. There are a lot of homes sitting vacant too. Some of the guys that post on here subdivide and that of course will get you a great return but it takes money to make money (or at least access to money) so you may not have that backing unless your grandmother is helping you or you have the funds to buy properties on large lots and do that.As for the rental market, some of the nicer and larger properties (more $$) are sitting vacant right now in Pierce Co. ; if it's a really desirable area, they are renting out quickly (a little under $1/sq. foot) but that little burst of 0% vacancy that we had for awhile is slowing down now that school has started. The 2 bedroom 2 bath townhomes are in demand (and anything in the 1K range will rent quickly) but the higher priced units seem to be a little harder to lease at the moment.

Ryland Taniguchi · Answer

2% rule rarely exists around here. I think most buy and hold investors around here mostly look at the 1% rule. When you understand how to calculate an Internal Rate of Return, it factors in your cash flow and the exit price that you can to sell it more down the road. So although there is no 2% rule, you could possibly getting more appreciation if your location is good. But that being said, it is easier to predict future cash flow streams and nearly impossible to predict future appreciation.I am finding 1.5% rule in Tacoma using the BRRRR strategy. But I also have deal acquisition systems and find better deals that almost everyone else.

Thomas S. · Answer

I prefer the 50% rule as a ball park consideration point. What you really want to know is if the property will cash flow and to determine if it is worth investigating farther. Once you understand how the machine works you realise the rules are only guide lines fashioned to meet the goals of different investment strategies.The 2% rule is better suited for those interested in paying off properties, which personally I do not support as a investment strategy, as opposed to those seeking realistic cash flow. If a rule does not work then the purpose of the rule does not apply to your investment goals.

Account Closed · Answer

@Jacob Wyatt The majority of our deals are found on the MLS. They are value add type deals usually from tired out landlords that haven't raised rents in years. We have closed a couple off market deals through relationships I've made over the years. As far as comparable rents go the best advice I would have is to keep a close eye on craigslist, Zillow rentals and other similar site. It can't be something that can be done overnight. It usually takes a couple of weeks to months of monitoring the market to get a good idea of what market rents are. You can also keep a spreadsheet to help track rents. Pay attention to what units are renting for per square foot. Hope that helps!

Account Closed · Answer

I don't use any of the 1%, 2%, 50% rules. Investment property is an investment so I evaluate it the same way I would any other investment. If I buy a property, what ROI (aka cash on cash) can I realize on the money I have to put into it and how does that compare to what I could earn if I put my money elsewhere? One of the things I do is plug all available multi-families in my target areas into a spreadsheet and I can quickly see a rough estimate of how much cash I'd need to put into the property, closing costs, rehab costs and how much I could expect to make after paying all expenses and allocating for vacancies, capex, etc. This will produce an estimated cash on cash for every property available and I can see which ones would likely yield the best return. In the end, I'm really looking for properties that will yield the best return and meet a few of my other core criteria (target zip codes, max purchase price, non-commercial)

Lane Kawaoka · Answer

Jacob Wyatt of you find a 2% in Seattle. There must be something terribly wrong with it.

Ali Boone · Answer

You definitely won't find the 2% rule in Seattle, or anywhere on the west coast. If you do, run far away from it. The 2% rule used to be attainable in quite a few markets a few years ago, but it's not really a thing anymore based on the current real estate economy. That issue aside, I'd say toss the "rules" because they won't give you ultimately what you need to know anyway...the cash flow. You should never buy a property because it meets the 1% or 2% rule or any of those. Run the actual numbers...because guessing and estimating never did any real estate investors any favors. Check this article out for details on how to run them-http://www.biggerpockets.com/renewsblog/2013/01/19...I live in LA and the numbers here are like Seattle (but worse). The reality is there just isn't monthly cash flow here. Appreciation, maybe, but no cash flow. So I've always bought out-of-state. A lot of west coasters do.

Rajesh Kodali · Answer

Great info. What are the best places in Pierce county to invest. I am new to real estate investing and looking for best options for rental properties around 100K in the area.