How Investors Get Burned Following the 2% Rule in Low-Income Neighborhoods

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As a new investor, I lost a stunning amount of money on low-end properties.

On paper, the numbers look gorgeous: “I can charge $1,000 in rent for a $30,000 property?! What can go wrong?”

A lot, it turns out. But these costs are not always obvious, and even when they are, they’re not always politically correct to talk about.

The “2% Rule” claims that a property that rents for more than 2% of the purchase price is usually a good deal. But these sorts of shorthand rules can be deadly, especially for new investors. I touched on this as one of the 7 Lessons I Wish I’d Known When I Started Investing, and it’s worth a closer look.

Here’s how low-end real estate can end up ravaging investors and how to avoid losing your shirt.

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Location is number one…Cash flow is number 2

High caps mean high risks…I look at high cap real estate in marginal neighborhoods like junk bonds…But look at EPA… $100k at the courthouse in 2009 … $1500 rents…now they areWorth$5-600k and rent for $3000/m…

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Can someone sell me some EPA homes for $100k? I’m not greedy, I just need about 10 of them :slight_smile:

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I was there in 2009 at the courthouse…I didn’t even want drive in EPA, let alone buy property there…like most everyone else…The guys buying paid cash and didn’t even care about cash flow…They just knew they were buying at 80% off 2006 prices…

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Well, in 2009 I saw my stock portfolio got cut by 60% and was in no shape nor mood to do anything besides crying myself to sleep every night… :sob:

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Slum tenant is a nightmare in bad neighborhood

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Don’t worry there’s always Section 8.

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Right, but EPA does benefit from the location aspect, the closeness to all that is golden down there in SV…

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Nope. You snooze you lose. The next time the market falls, buy in EPA and NFO (North fair oaks). They’ll go down the most on the peninsula, and eventually will gentrify like everything else.

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But EPA prices were cut by 75%. You would have made more on the increase :slight_smile:

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He’s got some good articles there. Thanks for sending the link.

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You are rare that you actually read the articles. I bet most commenters just want a space to rant. :smile:

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I like to rant, but I also sat through that 30min podcast about Chinese magnificence you posted on another thread.

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Really? Did you get rabidly excited about Chinese tech companies?

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Yes was interesting! But it’s kind of technology overload for me. Sometimes I like to do things the old fashioned way :slight_smile:

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So lucky, I went into fetal position when my stock portfolio got chopped by 90% in 2000.

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After your 60% cut in 2009, how much did your portfolio bounce for 2009-2012? And how much did it go up from 2007-2009?

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The problem with stocks is the pain of losing is more powerful than the euphoria of winning…Most people are risk adverse …Playing the stock market keeps them awake at night. .Real estate is easier on the psyche

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Low-end doesn’t work unless it’s section 8.

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Why section 8 is better than other low end tenant? Guaranteed payment of rent?