2% v. 50% Rules in Saint Louis

[David Coombes]

Today For the last several months I've been analyzing properties listed for sale in the Tower Grove and select South City areas of Saint Louis to buy and hold. Very few are meeting the 2% rule though some pass using the 50% rule. Of the BPers who invest in Saint Louis, what guidelines are you using to identify prospective cash flowing properties? 

[Logan Turner]

So it is very, very rare to find 2% rule deals. Those are rarely, if ever, found on MLS, zillow etc. A deal usually only needs to be at 1% to meet the 50% rule.

ex. with some quick dirty numbers: 100k house, renting at 2k (2%), mortgage would be $530. Throw in 1k in expenses and you cash flow at 470 dollars with very conservative numbers. That would be an incredible deal and a few of those would have you set. 

Thats almost 30 percent Cash on cash return (not talking about ROI with debt pay down and appreciation) Double your money in every 3 years.

Now 1 percent rule on same house. 100k, rents at 1k. mortgage is 530, expenses 500. You negative cash flow 30 dollars with very conservative numbers.  

As you can see in this example you would only need slightly above 1% to make deals work with 20 percent down, and this is buying without any discount and without doing anything to add value to the property. 

Also, the worse neighborhood you enter (C and D classes) the better the property will look on paper. But, don't be fooled as the cheaper houses (say 50k) will still have the same cost for an HVAC or roof (Cap Ex.) and also will have higher repair costs (usually) and vacancy rates d/t the renter population. 

Just analyze the property with 40-50 percent of gross rent dedicated to expenses (maybe 50 for c and d and 40 for B or A) 

150/mo for repairs/maintenance is a good figure, get an insurance estimate to break it down monthly, calculate the taxes (county records) and do play with the vacancy rate depending on your area. Say 5-8% for a A/B area and 10-12% for a worse one, and then of course 8-10 percent for PM (even if you plan to do it yourself)

Again, 2 percent rule is very very rare. Find a distressed place that can be brought up to rental standards in the neighborhood. Then maybe you can create a 2 percent property, based on your buying price, but its unlikely you will find one already at 2%. Who would sell such a property thats cash flowing so much! You have to find the problem with the place and solve it to reap the rewards