How to better spot deals?

[Chad Tessmann]

I've been analyzing a few properties every day, but I can never seem to find a property that will get me above the 2% test (Turner: The Book on Rental Property Investing, pg. 124). In my area (Manitowoc/Sheboygan, WI), rental units are going for around the $800/month mark depending on the property. But when analyzing a duplex or SFR, the 2% test rarely gives me more then 1.7%. I've analyzed a few dozen properties already and nothing even comes close to the 2%.

How do I spot better deals or am I just in a bad area right now and need to look at farther away areas?

Following Brandon Turner's book, I take the estimated monthly income, and divide it by the total purchase cost of the property to give me the percentage.  If this percentage is above 2% than the property warrants further study, but most properties are no where near that mark.  The first test is the 50% rule of thumb where I take the estimated monthly income, divide that by 2 and then subtract the monthly mortgage.  If the 50% rule of thumb claims a positive cash flow, I move to the 2% test.  If the 2% test passes (and it hasn't yet), I will then spend more time analyzing the property.

[Stephen Brown]

Hey Chad. Most properties don't meet the 2% test. In fact many don't even reach 1.5%. You'll probably stick to somewhere around 1.2% and then with appreciation you may be able to get the 2% you desire after a few years.