Tim - primary markets that are the largest in the state will always attract the most investors with the deepest pockets; this includes Private Equity funds that are in-play in most primary and secondary markets in NC. Though I agree with you that 1% deals aren't readily available on the MLS, they're still out there in the form of off-market transactions and value-add plays. In addition, you will find that the 1% rule was created to be used primarily as a cash-flow consideration, and as an average and doesn't really consider the other variables to cash flow like property taxes, insurance, CAPEX and vacancy as well as appreciation because that is speculative. In NC, we have pretty low property taxes compared to places like NY or Chicago. It's not unheard of to see an $80K, 2/1 house have property taxes of $400-$700. With that being said, consider a brief, over-simplified case study. Primary markets are much more complex from an appreciation perspective so I will stay away from that:
House 1: $70K in a tertiary market with a $600/tenant with a 20% DP. Yes - these are common in NC tertiaries and even some secondaries. You can probably expect a levered-ROI of 10% with all expenses and reserves considered which could net you $1,500 or so per year. Because its a small market with not much job growth and therefore not much population growth, it'll always be a good, base-hit cash flow market and your long-run appreciation might be 2% per year (or potentially just buoy up and down for 30 years) and rent isn't expected to move much because of the lack of job/pop growth. So over 30 years your projected cash flow is around $45K and appreciation of $60K ($105k total). However during that time, you've replaced the roof ($7K), siding ($6k), windows ($6k), HVAC ($8k), all appliances 2-3 times ($5K), cabinets ($3K), and countertops a few times from wear and tear ($3k). In addition, you've had migrant tenants so there's been 10+ turns resulting in expenses above and beyond the tenant SD and legal costs to try and collect were too high so you covered the difference of $1K each time ($10k). Those 10 turns also resulted in lease-up of 1 months' rent to the PM company ($6,000). Add it all up and your net return turned into ~$51k very quickly but still a modest 3.5x-4x return on your money. The above expenses are conservative and assume the reserves calcs covered other plumbing, repair, etc. surprises.
House 2: $300,000 in a secondary market with a $1,800 tenant. Also common. At the start, a levered-ROI will probably be 0-3%. However, 5 years in, there's a good likelihood that your rents have increased $100-$300/m without a turn needed because a married couple working in finance doesn't want to pay a moving company every 2 years, and their golden retriever (that also earned you a pet fee and pet rent) loves the fenced in backyard. If we consider a 30 year avg rent of $2,200 and ONLY a 3% appreciation (I'd "budget" a bit higher), your net cash-flow expectation is around $120k with appreciation of ~$450K ($570K total). Sure, your roof will be a bit more expense ($10K), HVAC is an HVAC in most cases ($8K), there's more siding ($10K) and windows ($15k), SS appliances aren't that much more ($9k), probably a few extra cabinets ($5k), granite is definitely more than formica ($6k), and you now have a garage door to worry about ($2k). The IT couple doesn't want to move, their dream home is becoming exceedingly more expensive and investors are scooping up inventory similar to yours cash, and every other rental looks the same so they or their similar avatar stay for 6-7 years resulting in 5 turns, max ($9K lease-up fees). Lastly, each turn isn't that much higher because finance-couple took care of the home and want their SD back, and obviously don't want extra damages in collections on their credit score ($3k x 5 = $15K). Your net here is more around $481k or a 8x on your money. BTW, even using that same 2% appreciation as in the tertiary market, your return multiple is still around 4.5x-5x.
Sure it looks awesome to find a solid cash-flow asset, but cash flow is defense against capex and maintenance. Appreciation and pulling equity out to re-invest is the offense that lights up the scoreboard. You can see why people will take a $0 or a small L monthly to buy and hold in primary markets like Charlotte and Raleigh; these places are booming and upward trending home prices will inevitably pull rents up with them with a 1-3 year lag, but it will come.
