How to better spot deals?

Question

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 · Answer

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.

Chris Crubaugh · Answer

Hi Chad, the 2% rule should mostly be used as a ballpark, and in today's market is more realistically a 1% rule. The market is a lot different now than in 2015 when Brandon Turner wrote the book as prices back then were much cheaper due to the crash in 08.

Also, as deals are hard to find, sometimes a good deal can be hidden in the details. The 1/2% rule is very commonly known and used. If you can find an angle that isn't easily recognizable, you can find a diamond that is covered in dirt.

You could try looking past rules and focus on the dollar amounts and other factors of a deal. What's the COC, and what's the property condition (most importantly the roof, foundation, and overall building)? Are you able to strategically reduce costs or increase rents or generate any other sources of income from the property (garage rental, coin-op laundry, etc).

After adding creativity to the deal and considering other factors, you can work a deal to become a lot more profitable than the initial 1/2% rule.

Chad Tessmann · Answer

So I'm not alone on this!  But, to help me focus my time on analyzing properties with potential instead of every opportunity I come across; should I reduce the "2% test" to 1.6% and focus on those?