2% AVR won't Work in High Priced Cities,Will This?

I’m a couple flips away from doing my first buy and hold rental property; but I’m looking ahead to that first positive monthly cash flow. After reading a few books I’m feeling pretty confident (dangerous situation,that) except for the whole 1% or 2% of retail value or ARV or Cost of property (including rehab). As a rule it seems not to work on the inflated East and West coast cities like mine. I’m in Long Beach, California.

Here a blue color house rents for 800/month so at 2% that’s a purchase price of $40,000. You can’t buy a house for $40K even if you burn it to the ground and just buy the land. More typical ARV’s here are $350K to $450K. Same situation with 4 plexes (quads). In my market a $650K 4plex with $3960/monthly gross rents would need to be purchased for $298K to meet the 2% rule.

I plan to forget the 2% rule and just do the following:

  1. Only buy properties at a discount of 30% off ARV (including initial repairs)
  2. Figure my expenses as 50% gross rents.
  3. Only buy properties when I can put enough down to get $200 positive cash flow per unit.

Love to here comment on this plan from those with a lot of rental experience.

Sure you can. You just need to learn to find them.

I’m in a similar position, wanting to invest in NYC / Brooklyn area and the prices are so extreme that you’ll never find anything that meets the 2% rule unless you’re extremely lucky and a friend practically gives you their property.
Or in another case if a seller has to move and sell quickly but such is the competition here is that home owners here KNOW that they can and will get good money for their home in a matter of days.

So unless there is some magic formula that lands a seller in your hands and makes them sell to you straight away instead of merely posting on Craigslist and getting a dozen better offers it seems the only way to make this work is to buy at a slight discount with a high down-payment in order to generate positive cash flow…

Anyway, I’d love to hear some stories of people buying at < 70% ARV or even getting offers accepted at that 2% rule in the inflated East and West coast cities. Could do with the inspiration. :slight_smile:

myles - I am going through a similar exercise here. It is very hard to find properties that would cash flow. I also considered what you said - I can put a large enough down payment so the property would cash flow. Actually if you think about it - any property could cash flow if you put a large enough down payment.

The problem is that you may end up tying to much money in the property that it may hurt your return on investment (ROI). For example, would you invest 100,000k to get $200/month ($2,400/year)? When you do the math you end up with 2.4% ROI. You can get better rates elsewhere (i.e. CDs). You could also factor in the property appreciation, tax benefits and principal payment by the tenant to get your ROI higher. However how much higher would you be able to get it?

So for now I will stick with my original plan of getting properties low enough that will allow me to cash flow and get a good ROI. Even if it will take me few months to find them.

Good luck!

Myles, I live and starting to invest in NYC, there is NOO 2% rule here. Try 65-80% rule. If you find any (2%) please let me know. :biggrin.

You are correct, at some point a higher down payment is just a pointless investment of the money!
Looking at the numbers here, there are many 6 unit properties listed for $600k and at that point you are starting to generate positive cash flow as long as you can secure some decent financing.

However financing options are much more limited for someone starting out because to purchase a home over 4 units here, you have to qualify for a commercial loan (at least as far as I’ve been told for NY). This leaves owner-financing or the the other option which I am considering of partnership to increase the chances of securing a commercial loan.

I agree, for some areas of Brooklyn, you should be able to find discounts on the ARV. At least Real Estate is so flexible that you can approach it from many ways and find a formula that is successful for your area!