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June 02, 2014

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In my neck of the woods, monthly rent is less than half of the 2% rule. If I were to rent my former townhouse (which I sold last year for $240K), I wouldn't expect to get more than about $1800 a month.

I find those rules to be unreasonable as would any other real estate investor. The only way those rules could work is if the properties being purchased were in the absolute lowest end of the market or you found an absolute steal. As the prices of properties go down, the rental yield goes up. (A 50k property may rent for $600, 100k property $850, and 200k property $1400. Notice how the rents don't grow linearly)

The problem is that lower end properties have difficult rental environments AND are a bigger investment in time for the dollars spent. If you plan to own 500k in real estate, you can own ten, 50k units, five 100k units or 3 170k units. The rental yield goes down but so do the headaches.

I think one of the most important steps before real estate investing is to find the right price point level for purchases. If you are not willing to deal with the issues of places that rent for $500/month then don't compare the financials of that type of place with the financials of a place that rents for $900/month.

My personal opinion is to find the lowest price point in your market where you feel comfortable with the tenants that will qualify to rent your property. In my market this is nowhere near the 2% rule. @FMF if you used the actual value of the properties that you own now, these would also not come close to the 2% rule. Another point to consider is that is doesn't matter what you paid, the yield is really more on what they are worth. If you bought for 150k and put in 30k and now it is worth 300k then your return on investment is based on 180k but I don't that is the right value to use for the rental yield.

The 2% rule may well be reasonable in areas where home prices are very low but it is totally out of line for places like Silicon Valley which currently has very high prices and a very low inventory. Currently the inventory of homes for sale is at an all time low of 2.1 months and prices are rising rapidly.

All Real Estate is local. National rules of thumb do not work unless you are willing to invest out of state in areas where these rules are achievable.

Bigger Pockets caters to a very wide array of real estate investors. Flippers, wholesalers, notes investors are all just as common as buy and hold investors when it comes to the bigger pockets audience. As such the messaging coming from the site can be a bit difficult to target at one specific niche of investor. It's there if you dig for it but you have to be careful not to get confused by advice targeted at different kinds of investors especially since often the articles are written from the perspective of someone who has their hands in multiple aspects. Such as a wholesaler who sometimes flips a house they can't find a wholesale buyer for and then sometimes holds a house as a rental that they can't find a flip buyer for.

Don't get me wrong, I like the site and read it regularly. It's just that the advice has to be sifted for the pieces that apply to each situation.

The 70% rule is not designed for a buy and hold investor. It's simply a rule designed for a flipper to make sure they can make money in the end. In order to achieve that number you would have to find a place that would have great difficulty being sold to the general public on the retail market. Basically it would have to be in a shape such that no bank would give you a conventional mortgage on it or it would have to be in an area that for one reason or another very few people wanted to buy in. If it was not how could you buy it at 30% below market.

The 2% rule is also too optimistic for most properties in most markets. There are pockets where you can get those numbers. They are usually very cheap houses, sub 50K houses. Some people do very well in those kinds of markets. That is not one that I choose to invest in for various reasons, which I explained in my real estate 101 series. That is not to say there aren't good reasons to invest in those properties, it's just that those kinds of returns come with very specific properties that come with their own issues typically. My focus is on return on door more so than return on dollar.

As to the 50% rule I spend far less than 50% on expenses, but I have new properties in very good neighborhoods with good tenants and do my own property management. So what I don't get in the 2% rule I more than make up for in doing far better than the 50% rule.

To repeat what I started with, all real estate is local, REALLY LOCAL. As in specific to your state, to your city, to your neighborhood, and to your property type.

Rules of thumb are fine, but they need to be tailored to what is typical in your local real estate market. If your market won't support anything close to the 2% rule then trying to find it is a waste of time.

You need to find what numbers will work in your market and focus on those rules of thumbs. Doing anything else will be frustrating and misleading as to whether or not you can be successful.

Agree with Old Limey. The 2% rule would not really work in Bay Area at these housing cost levels.

Not sure how the 2% rule would work on anything other than low priced multi-unit buildings (which may be the point, that they are the only good rental props). Even for something like a small $120,000 townhouse in my area, how/why in the world would someone pay $2400/mth for it.

You'd be lucky to get 1% of the purchase price in Portland/Seattle area. I guess you have to drive out a bit. For close in, it's more like .5%.

The construction of the new Apple campus in the heart of Silicon Valley is having an unbelievable impact on the prices of homes in the adjacent areas. The design is a huge circular building that will be home to 13,000 engineers and designers with an underground garage for 2,000 cars. This new breed of young employees don't like long commutes and prefer being able to bicycle, skateboard, or walk to work. It would currently be hard to find a nearby home for less than $1M and choice 40+ year old homes go for $1.5M-$2M. There's no way anyone would want to pay 2% of the home value every month to rent one which limits the only sensible choice to become an owner rather than a renter.

One of the main through roads that I have used for 40+ years is going to be closed about a mile from me so that traffic can be diverted around the campus. There are also several very large 5+ story condo complexes that are under construction nearby which will offer another alternative for potential buyers. They have to build such densely populated complexes because large available building sites are few in number and vacant land goes for $2M/acre.

This valley is becoming a far cry from when it was covered with prune and apricot orchards and called "The Valley of Heart's Delight". In those days, in the springtime the view from the surrounding hills & mountains was pink blossom trees everywhere you looked.

Real estate numbers are purely local. I actually do follow the 2% rule. In my market (TN) it can work. However, deals that suffice are usually low income. As mentioned earlier, you have to decide why you are investing.
I'm striving to replace my corporate income so that I'm not dependent on my job. Therefore, I approach things as a rental business. I'm not looking at appreciation as much... its all about monthly cash flow for me. If you look at real estate as a retirement piece of your portfolio, more expensive properties that don't fit the 2% rule may be a better play.

I live in Alabama and have 2 rental properties. One was a foreclosure I purchased and renovated. The other is my former home. Both rent for about 1% +/- of acquisition cost plus improvements. I am much more concerned about being cash flow positive than a rule of thumb. One house is paid off and the other will be paid off in 3 years. I agree you can hit 2% if you go to the low end of the market. I'd rather have steady income from good tenants than a high return on paper that comes with a raft of problems.

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