1% rule link

[nsmall]

https://affordanything.com/one-percent-rule-gross-rent-multiplier/

Is that link above any good?  I keep hearing you all talk about this and I sadly never knew about this rule.

Thanks

[marty998]

It is a rule of thumb that is popular with many people here.

It will rule out any investment property located in any high-value major global city (New York, London, Hong Kong, Vancouver, Tokyo, Sydney, Singapore etc).

That doesn't make investing in those cities a lousy proposition, far from it if you are prepared to tolerate negative cash flow in return for higher long term capital growth.

But if cash flow is your game, and if you operate in relatively low-value markets (under $200k), then even I will admit this is a rule worth following.

[waltworks]

Yeah, returns on investments in RE in the last decade look pretty great even if you didn't buy properties that cash flow. You could toss darts at a map of almost any big city in the developed world in 2009 and just buy at random and you'd have done awesome.

So lots of people think they're geniuses right now (with leverage, those returns are totally insane, and a good chunk of the reason I'm FI now). They're (I'm) not, though. The 1% rule keeps you from screwing yourself if you *don't* see meaningful appreciation and pretty much guarantees that you'll match or exceed average stock market returns.

There are a LOT of people holding onto non-cashflowing expensive RE in big cities (especially in the US and Australia) right now who are probably pretty much screwed. I sold all of my rental properties over the last few years because I'm expecting zero or negative appreciation for at least a decade.

I'd suggest avoiding buying RE if it doesn't meet the 1% rule, even if that means not investing in RE at all right now. That said, I've certainly been wrong before.

-W

[tralfamadorian]

It's a place to start but when you are seriously shopping for investment properties, you would be better served to determine the true costs for that area (management, tax rate, insurance costs, repair, capex, vacancy). Some places you can go under and still do well because taxes and insurance are low while the quality and quantity of tenants are high. Quite a few places will seem like a slam dunk at 1.5%+ until you learn that no management company will touch it at less than 15%, the taxes are insane and tenant turnover is high.

[nsmall]

Does the 1% rule consider buying the home with renting in mind?  I had to put 20% down. 

Homes I am renting are:

A) bought it for 153K, have a mortgage of $1009, rent it for $1575
B) Bought it for 172k, have a mortgage of 1060, rent it for $1821

Both homes I bought about 5 years ago and I have high 4% interest rates on them.

Both have long term tenants (over 10 years) so I will keep renting to them even though its tempting to dump one in 2019 and one in 2020 as I am trying to leave CA.

So based on my math, which may be wrong, I am barely hitting 1%?

 Thanks for your help.

[Another Reader]

What are the houses worth today?  If they have appreciated significantly since you bought them, they would no longer meet the 1 percent rule of thumb, based on current rents.

If you are moving out of state, you will likely have to hire a property manager if you are not already using one.  Trying to manage leasing and repairs from a distance can be challenging.

More reasons to consider whether selling is the better option.

[SwordGuy]

I get 1.6% to 1.7% on my rental properties.  I'm not interested in 1% cash flow.  I don't expect massive appreciation in my area unlike some areas.

[waltworks]

I use the "how much would I walk away with" 1% rule for places that I've had for a while.

So if, to use an extreme example, say I bought a place for $200k that's now worth $400k and rents for $2k/month (assume it's paid off).

If I moved out of the place last year and still have a capital gains exemption, and minimal depreciation to pay back, and my buddy down the street wants to buy it with no realtor commissions involved, I might walk away with, say $390k. $390k invested elsewhere could be doing *way* better than grossing $2k/month for me, so I'd sell.

Same house, but I've fully depreciated it for 28 years and never lived there so I'll owe capital gains. I'm going to pay 6% to realtors to sell it. Now I might only walk away with $250k or even a bit less (exact numbers will depend on your tax situation of course). I might hang onto it in that situation.

-W