Is the 1% rule ever coming back?

[CanuckExpat]

If people's expectations of future appreciation start to wane, I would expect to see a lot of rental properties converted into owner occupied as landlords cash out their holdings and move to more attractive investments.

The tax implications would make this unattractive for many people wouldn't it?

[SwordGuy]

Just put the worst deal I've done on the rental market yesterday.   

$900/month rent with a $70,000 ready-to-rent cost.  That's 1.285%. 

(Would have been $65,000 ready-to-rent cost but the HVAC broke after I bought it and before I rented it. :( Would have been 1.38%.)

Prior properties have been in the 1.6% to 1.7% range.

I think it's a combination of lots of out of town money driving up prices plus we're many years into a boom cycle, so fewer people have to sell their properties.

[YttriumNitrate]

If people's expectations of future appreciation start to wane, I would expect to see a lot of rental properties converted into owner occupied as landlords cash out their holdings and move to more attractive investments.

The tax implications would make this unattractive for many people wouldn't it?

I wouldn't say unattractive, perhaps a bit of a barrier but somewhat on par with selling a stock that had a good run and has now flat-lined and entered a slow decline. There is also the recapture of depreciation, but that only applies to the structures as land isn't depreciated.

[powskier]

1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.

[Rick Imby]

The 1% rule is a guideline for investors buying rentals.  The rental rated have several factors causing that to change.  The price of houses is dependent on many different factors also.  If you are looking for descent cash returns which depend on the current rents and current house prices then the 1% rule makes a lot of sense.

However the long term migration in or out of an area will have a huge impact both on the price of housing and the price of rent in the future.  I would want to be buying real estate in areas that people are moving into.

[waltworks]

That's a good point. I think a lot of the rust-belt and flood/hurricane damage southeast real estate that people are psyched about here the last few years is probably a mediocre to bad bet in the 10+ year time frame. But who knows?

Personally I'll wait for the current cycle to end before getting back into RE. There will be buying opportunities again, though I'm not about to predict when.

-W

[Jon Bon]

My personal opinion is the 1% rule has been a good way to measure risk and return. A generally fair way to say an investor will bear X amount of risk with Y amount of return.

However the central banks of the world seamed to have changed this. The last number I heard was that about 12 trillion dollars (euros, yen, pounds etc) had been injected into the world economy. SO this makes houses WAY more expensive. However wages and rents are much stickier and have not been able to keep up.

So until some of this QE unwinds or we hit another major real estate decline I dont see it coming back for a while.  However the next bubble deflating might just have central banks inject 24 trillion into the system! :)


*Note it wont ever come back in the superstar cities as discussed above.

[FIPurpose]

As I've been looking to move back into the southern WA area. I started looking for a personal house. The rent in the Vancouver, WA (Portland, OR urban town) is going at about .5%. So when I started looking at renting a place, we were probably looking at places that would rent for 1200-1400 a month vs. a 300-350k house.

But I have noticed that a lot of the condos are still reasonably priced for what they are. I guess there's less demand for them? Even here they don't run close to the 1% rule, but they are probably around .8%.

So even for a personal home, when the rental market is completely out of step with the housing prices, I just can't as a good mustachian buy a house. I even put the numbers into a calculator of how many years to own, before owning is the better deal. The answer was never. So for most west coast cities, it seems that the only way to buy a good rental is to make your own on a flip.

[MrSpendy]

Deleted a post a deemed not relevant to thread as it regarded coastal real estate which OP acknowledged may be structurally different

[CanuckExpat]

Tangentially related, academic paper on The Rise of Institutional Investment in the Residential Real Estate Market seems to argue that increased institutional investment is correlated with a rise in prices of properties

[Xlar]

As I've been looking to move back into the southern WA area. I started looking for a personal house. The rent in the Vancouver, WA (Portland, OR urban town) is going at about .5%. So when I started looking at renting a place, we were probably looking at places that would rent for 1200-1400 a month vs. a 300-350k house.

But I have noticed that a lot of the condos are still reasonably priced for what they are. I guess there's less demand for them? Even here they don't run close to the 1% rule, but they are probably around .8%.

So even for a personal home, when the rental market is completely out of step with the housing prices, I just can't as a good mustachian buy a house. I even put the numbers into a calculator of how many years to own, before owning is the better deal. The answer was never. So for most west coast cities, it seems that the only way to buy a good rental is to make your own on a flip.

Are you including the additional HOA fee with the condo when comparing it to houses? In my area the % is roughly equal once you include the much higher HOA fee. For example you can rent a 600k house for 2,600 (0.43%) or a 410k condo for 2,000 (0.49%). But the condo has a $350 per month HOA fee! So that would reduce the condo to 0.40% when compared to the house!

[FIPurpose]

As I've been looking to move back into the southern WA area. I started looking for a personal house. The rent in the Vancouver, WA (Portland, OR urban town) is going at about .5%. So when I started looking at renting a place, we were probably looking at places that would rent for 1200-1400 a month vs. a 300-350k house.

But I have noticed that a lot of the condos are still reasonably priced for what they are. I guess there's less demand for them? Even here they don't run close to the 1% rule, but they are probably around .8%.

So even for a personal home, when the rental market is completely out of step with the housing prices, I just can't as a good mustachian buy a house. I even put the numbers into a calculator of how many years to own, before owning is the better deal. The answer was never. So for most west coast cities, it seems that the only way to buy a good rental is to make your own on a flip.

Are you including the additional HOA fee with the condo when comparing it to houses? In my area the % is roughly equal once you include the much higher HOA fee. For example you can rent a 600k house for 2,600 (0.43%) or a 410k condo for 2,000 (0.49%). But the condo has a $350 per month HOA fee! So that would reduce the condo to 0.40% when compared to the house!

Most condos I look at are sub $150/month. I would assume that even applying the 1% rule to condos, you come out ahead per sqft wise in a lot of the west coast.  But you also have to add in that part of the HOA fee for a condo is going towards maintenance/ repair work that you're not specifically liable for. So it's not a 100% bust.

[Stretch67]

I've literally seen a few properties in Toronto and Vancouver which are renting in the 0.1% range. An order of magnitude off of what's considered prudent.

Most people are lemmings who can't think for themselves, follow the crowds, and are slaves to the short term. This in turn often self-induces a feedback loop both proving everyone right, and exacerbating the situation, and more people pile in.

"30% YoY gains? I'm in! No matter what I pay, it doesn't matter since it will be worth more next year, and I get a "free" place to live. Look at you Zoidberg! You're finally becoming a crafty consumer"

Then unfortunately you get to a point where society simply runs out of money. When the average home in Vancouver takes 100% of the average person's income to buy, further price gains simply can not be effected as no one can afford to buy. So you see people moving to what they can afford, below average homes at average prices which is where I think we are now in Canada. Everyone getting into 500 sq ft condos, and prices escalating, because that's literally the only thing people can afford. Meanwhile all homes at the average level or higher are crashing.

Then eventually you get the opposite effect. "Prices are falling along with the sky! Get out no matter what! At any price! Sell for whatever you can because it will be worth less tomorrow!" Then this opposing self reinforcing loop takes hold.

Eventually you get to a point where the mustachians with cash look at the numbers and say "you know what? Even if prices fall another 20%, its prime location in a world class city returning 1.4%/mth, even if I never sell or look at the property value again, this is a 500k investment that will return 12% per year forever" Prices start to climb, more people start to think that Hey maybe RE isn's so bad after all and the cycle repeats.

Unfortunately RE is funny in that the vast majority of consumers are financially illiterate and turn to Home flipping TV shows for investment advice. Prices are very very sticky, people get hugely emotialy attached to their homes, will pawn the TV and kids vs losing the home to the bank, and the only people willing to sell for less than they bought are doing so because they literally have no other choice. This means the RE cycle is loooooooong.

Contrast this with the stock markets. The vast majority of people are there to make money, much less emotional attachment, and you can go from insanely overpriced to a bargain you can't ignore in a year or two. 

I too am eagerly awaiting a return to pricing sanity. I rent now because the numbers make more sense, despite having the stache to buy a house cash. I'm Warren Buffet in 1999 lamenting tech stocks that have returned 100%+ several years running despite no profits. It's damn frustrating to hear gloats from people up to their eyes in debt who indeed have make a tax free 500k cap gain about how I'm just a 'bitter priced out renter who lacks the courage to get rich' but alas, I'll stick with the numbers. I heard the same thing from co-workers at an old job about bit coin 18 months ago.

I guess I like this post the best.

I don't see how the top 10 percenters can drive up RE costs forever. Imho, a good chunk of their income (or the bosses ability to pay them) is based on their companies stock valuation.

When the stock reverts to the mean or even crashes below it, the raises/bonuses etc get tossed out the window. Companies fold left right and center no different than in 2000. I don't think the fundamentals have changed.

Business fundamentals haven't changed either. Businesses exist to make profit, generally. A lot of these HCOL areas are driven by what I'll call a combination of The Everything Bubble and Another Tech Boom. These big (tech?) companies, it's only a matter of time before they realize they can instantly add 10-20% to their bottom line by relocating to Sioux Falls or something similar. Especially when a lot of the work is done on computers, and the concept of "showing up to work" gets more flexible.

Another point I would like to add. And this is definitely taking the long view. Is anyone else concerned about the possibility that we may start see population or buyer decline? As in, more people heading for senior care/the grave than new buyers to fill their shoes?

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[sol]

I don't see how the top 10 percenters can drive up RE costs forever. Imho, a good chunk of their income (or the bosses ability to pay them) is based on their companies stock valuation.

I wish that were true!  The US stock market has a long term average near 10%, and if house prices followed stock valuations then house prices would also rise at about 10%.  Even in places like Vancouver, the long term trend is significantly below that.

Also a reminder that it doesn't make any sense to say "no one can afford to buy" at these prices, when it is the surplus of qualified buyers who are driving up the prices in the first place.  Prices in places like Vancouver are rising because there are too many more people who CAN afford to buy at those prices.  That will change some day, and then prices will fall in response to buyers' incomes.  But while they're rising?  Just like your investment in the stock index, housing is worth whatever the the market is willing to pay today and you can't really argue with that collective wisdom.   I don't think you can time the market in real estate any more than you can time the market in stocks.

[StarBright]

This was a super helpful thread for me! We've been keeping our eyes out for rental properties in a couple local to us areas for a little over a year, and setting money aside for when the time was right. We haven't seen anything close to the 1% rule.  And I'm even in a rust-belty area.

Will keep looking and saving but may or may not diversify into real estate depending on what (if anything) ever comes up. Good to keep options open though.

[K-ice]

I've never applied the 1% rule.

I just checked and we bought one property at 0.3%. The rents were way below market. Still today it is just 0.9% over ten years later.

Overall it has brought us slow and steady income. It has also appreciated, probably more than doubled. Based on current prices it would probably sell and produce only 0.45-0.5% for the next guy. Other properties are moving in the area at that ratio.

I have seriously questioned if we would be better to sell and invest in Vanguard funds for less stress. But I like having some real-estate and it is in a good area our vacancy rate was 1% over that time with just a few missed months.

[aajack]

Personally I'll wait for the current cycle to end before getting back into RE. There will be buying opportunities again, though I'm not about to predict when.

-W

So as a new investor, this has been one of my biggest points of confusion. How do you wait it out? I think you (Waltworks) mention you're dumping extra money into VTSAX for now, which is "boring," and you're waiting for the next sale. But if the market crashes, won't your VTSAX be crappy too? So you'll sell that at a loss to buy the RE on sale?

Like I say, I'm new to all of this, but this has been one of my big points of confusion. Unless you're just willing to park your $$ in a high interest savings account or money market, getting maybe 2.5%, I don't see how anyone will have money ready for the upcoming "sale"...

Anyone? What am I missing?

[sol]

So as a new investor, this has been one of my biggest points of confusion.

Yea, me too.  This community is pretty firmly in the philosophical camp that says "you can't time the stock market" and yet simultaneously in the opposing philosophical camp that says "you should time the real estate market".

If you want RE to be part of you asset allocation, then you should find the best deals you can there and buy them in accordance with your plan.  I don't think it make sense to say "I think that real estate is overpriced and not worth my investment dollars right now" and then turn around and say "nobody can possibly know if the stock market is overpriced and not worth my investment dollars right now."

[Stretch67]

Well.... I honestly have done quite well going from gold, to real estate, back to gold, back to real estate.

You usually have 1-3 years to decide if the markets on the way up or down. And u don't have to hit it perfectly at the top or bottom, u just have to hit the trend so to speak.

When RE starts slipping for a year or more, gold will start climbing and vice versa. The more interest they have in RE, the less they'll have in gold. Been that way for a loooong time. Like since biblical times.

I am loving the forum, but am a little perplexed at how "anti" a lot of the membership is at some other investments. My plan is to VTSAX "enough" for retirement, but also play with another 10% or so of my income. It's worked well so far.

Fwiw, it doesn't have to be gold either. Just find two asset classes that you KNOW something about, and that have an inverse relationship. I just like these two because they generally move slower. I don't have to worry about losing everything if I go on vacation for a month or two and the market changes. They also both have intrinsic value.

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[waltworks]

I've timed the RE market... twice. I'm FIRE almost entirely because of that.

It's much, much easier than stocks, or has been until recently. You can have detailed, granular knowledge of your local RE that an egghead on Wall Street can't match. You can knock on the door of that run-down house and make friends with the fellow who is underwater on it. You used to be able to go bid on houses that would rent for 3 or 4% of their purchase price right on the courthouse steps, and you probably will be able to again someday in some places. And of course you can spam the whole local area with your we-buy-cheap-houses thing and find people who are senile and take advantage of them, if that's your thing.

No-recourse leverage at government-subsidized interest rates is freely available to most US residents, too!

None of that is true for stocks, where you're at a huge information and analysis-time disadvantage to legions of those eggheads, not to mention that there's plenty of evidence that stock prices are mostly a random walk.

Totally different things.

-W

[Stretch67]

This ^^^^^

I did it twice as well, both of them in the last housing decline from 2009 and 2011. That's 90% of the reason I had my place paid for at 26 years old.

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[sol]

This ^^^^^

I did it twice as well, both of them in the last housing decline from 2009 and 2011. That's 90% of the reason I had my place paid for at 26 years old.

I'm certainly not disputing that it's possible to make money in real estate.  I've done it too.

But every time someone shows up here bragging about doubling their money by buying in at the 2009, I try to remember to point out that they could have quadrupled their money by buying the stock market index.  It's been really hard to lose money investing for the past decade.

[waltworks]

Oh, everyone feels like a genius right now, for sure. Lots of people just got lucky with basically anything they invested in (except bitcoin, ha). I certainly got lucky. But the RE buying opportunity was pretty obvious for a couple of years. Stocks only seem cheap in hindsight (they were sitting right around 15 P/E, ie historically average or at best just 25% on sale as compared to the modern P/E 20 average).

To be clear, I'm not saying you can very accurately time the entire national RE market (equivalent to timing your buying/selling of VTSAX). I'm saying that you can have enough granular knowledge of some small portion of the RE market to do really well if you're patient and enjoy following local RE.

-W

[tralfamadorian]

Stocks are or have become an efficient market. Dividends are determined by the owned company and legally everyone has access to the same information when making purchase or divestment decisions on identical shares within companies.

Real estate is an inefficient market with a relatively high barrier to entry. Rents are guided by the market but ultimately determined by the owner and any changes they make or have made to the property. The same information is available on Zillow but additional information is widely divergent depending on the personal relationships of the persons involved. The houses themselves are unique even with the same school district or neighborhood. Price changes can come relatively quickly (for real estate) but compared to stocks, it's glacial speed. 

Real estate in any direct ownership form is not as passive as the stock market but there are tax advantages. Real estate leverage is subsidized by the US government through our low fixed rate loans. For me, the pro/con list between the stock market and real estate is a wash. Properly chosen stock market investments (VTSAX instead of American Funds) or properly chosen real estate investments (desirable property in healthy economies with acceptable financials vs overpriced junk in high crime shrinking cities). Either way you are going to do well and it will only be in hindsight that you will know which outperformed the other over a particular period of time.

Personally I invest both in VTSAX and real estate and since their correlation is very low, it's a financially conservative decision.

To answer the OP's question, will the 1% rule come back? It never left but I presume you meant, will it be easy pickings like it was 10-12 years ago? Will there be real estate blood in the streets nationwide? Probably not. But real estate is cyclical and there will be buying opportunities in your target markets eventually. Perhaps it will bring potential properties' profitability (holy alliteration, batman!) up to a point where it would be worthwhile to invest in that property instead of VTSAX. Perhaps not. 

[roomtempmayo]

1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.

That's pretty much what I was thinking.

The capital to buy rental property is concentrated in a handful of metro areas, especially on the coasts.  Everyone wants to have local rentals, so it's not hard to see why returns will be low in those areas.

On the other hand, there are still plenty of places in the rural US and the Rust Belt where a $30-40k SFH rents for $600-1000/mo because there's significant local rental demand and low local supply of capital.  If you're willing to hire an agent to take care of rentals in an underserved market, you can still net well above 1%.  It's just much less likely to happen in a metro that's attracting lots of people with money to invest.

[FIPurpose]

1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.

That's pretty much what I was thinking.

The capital to buy rental property is concentrated in a handful of metro areas, especially on the coasts.  Everyone wants to have local rentals, so it's not hard to see why returns will be low in those areas.

On the other hand, there are still plenty of places in the rural US and the Rust Belt where a $30-40k SFH rents for $600-1000/mo because there's significant local rental demand and low local supply of capital.  If you're willing to hire an agent to take care of rentals in an underserved market, you can still net well above 1%.  It's just much less likely to happen in a metro that's attracting lots of people with money to invest.

So that's your risk that you're taking on. The markets that supply greater return also have an increased risk of longer periods of vacancy/ capital loss.

[roomtempmayo]

1% or more rule is alive and well in plenty of markets, just not the ones you are looking in.

That's pretty much what I was thinking.

The capital to buy rental property is concentrated in a handful of metro areas, especially on the coasts.  Everyone wants to have local rentals, so it's not hard to see why returns will be low in those areas.

On the other hand, there are still plenty of places in the rural US and the Rust Belt where a $30-40k SFH rents for $600-1000/mo because there's significant local rental demand and low local supply of capital.  If you're willing to hire an agent to take care of rentals in an underserved market, you can still net well above 1%.  It's just much less likely to happen in a metro that's attracting lots of people with money to invest.

So that's your risk that you're taking on. The markets that supply greater return also have an increased risk of longer periods of vacancy/ capital loss.

Especially in rural areas, there's also the well and septic to worry about.  Not small repairs if they need replacing.

Conversely, the decline in expected returns in many urban markets might also indicate a decline in risk.

[waltworks]

I'll go out on a limb and say that I think BOTH the ~1% rule properties in shrinking regions AND the 0.1% rule properties in the superstar cities are bad investments right now.

Lots of those 1% rule rust belt places are going to get just murdered with property taxes as the tax base shrinks. Rents are not likely to rise even with inflation. You might *never* be able to sell. There are places you wouldn't want *for free* that can rent for $500-800 a month (I'm not kidding, run the numbers on a $500/mo SFH with $2.5k in property taxes and all the usual maintenance/Capex/management/etc costs sometime - you wouldn't take it for free).

Likewise in the superstar cities, appreciation has been on a crazy run for a decade. That won't last forever and buying a place just to lose money every month on rent is the same sucker's bet that people were making in 2005. None of those places got magically more awesome in the last 10 years, and appreciation going forward (IMO) will *at best* match inflation.

I've been right about the RE market a couple of times before but my advice is of course worth what you paid for it.

-W

[Papa bear]

Those rural area, declining city, low income, section 8 type areas used to be the 2% rule properties.  That was only a handful of years ago that was the case.  I agree with waltworks that those at 1-1.5% are still terrible investments. 


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[CanuckExpat]

For properties you have where 1% rule is not applying, how much room do you have to raise rents. I know you can only get market rates, and you can't get blood from a stone, but there are roughly speaking only two things you can control: purchase price & rent requested

[K-ice]

For properties you have where 1% rule is not applying, how much room do you have to raise rents. I know you can only get market rates, and you can't get blood from a stone, but there are roughly speaking only two things you can control: purchase price & rent requested

The property we bought at 0.3% we were able to get it up to 0.5% in 6 months. There is rent control in the area & we were a bit worried because you need to tell new tenants the old rent. They can fight it but ours were artificially low because one was rented by the former owner’s son & the other was a 2bdm rented with a caveat to one person only. We also renovated them a lot. We explained the reasons for the large rent increase to the new tenants & they never fought it.

However, it was a bit nerve wracking waiting for the 30 days to pass.

[Jon Bon]

For properties you have where 1% rule is not applying, how much room do you have to raise rents. I know you can only get market rates, and you can't get blood from a stone, but there are roughly speaking only two things you can control: purchase price & rent requested

The property we bought at 0.3% we were able to get it up to 0.5% in 6 months. There is rent control in the area & we were a bit worried because you need to tell new tenants the old rent. They can fight it but ours were artificially low because one was rented by the former owner’s son & the other was a 2bdm rented with a caveat to one person only. We also renovated them a lot. We explained the reasons for the large rent increase to the new tenants & they never fought it.

However, it was a bit nerve wracking waiting for the 30 days to pass.

Care to share your numbers and rationale on that one? I know Canada is going to be different, but I'd like to know more about why folks are buying .3% properties.

[Seadog]

Care to share your numbers and rationale on that one? I know Canada is going to be different, but I'd like to know more about why folks are buying .3% properties.

0.3%? One can only wish...

Here's an article about 5 Vancouver properties renting in the 0.05-0.15%/month range.

https://vancouversun.com/news/local-news/five-metro-vancouver-mansions-being-rented-for-relatively-cheap-cheap-cheap

The reason is simple. Canada didn't see the huge declines that the US did in '08. An entire generation has only ever known RE to go up, and their idea of a "crash" is the period in '08 and home prices retracted like 10%, then quickly recouped it all 6 months later, and continued the upwards trajectory, peaking around 30% YoY gains. Given the short term memories of the average person, if 30% continued forever, then it really wouldn't matter that you're losing money every month, because that $5m home you just bought is appreciating at 125k per month. This can continue for a while (as it did), but once you approach 100% of your income to pay the mortgage/tax/insurance on the average dwelling, something has to give.

The other one I've read is a bit cultural. Canada has lots of immigrants, a huge number from South and Eastern Asia, a large proportion given out relatively small population. Over there I'm told from immigrant friends that RE is a bit of a racket, on average low wages make it impossible to get into, and landlords take all sorts of liberties that would be no where close to legal over here. Because of that, the culture is heavy into investing in RE, and sometimes try to play the same games as over there (ie my brother got 6 days notice to pack up and leave in the middle of a lease because the LL got a great unexpected offer on the condo).

[Seadog]

Then unfortunately you get to a point where society simply runs out of money. When the average home in Vancouver takes 100% of the average person's income to buy, further price gains simply can not be effected as no one can afford to buy.

As we have previously discussed in this very thread, I'm not sure that it matters what the average person can buy when there are 10x as many people as there are houses.  When a city only has enough houses for it's wealthiest 10%, then only the income of the wealthiest 10% matters to house prices.  The 90% are irrelevant, and thus so is the average.

And increasing wealth inequality only makes this problem worse, right?  Society as a whole may very well run out of money and ten million people may be literally starving in the streets, but if your neighborhood only has 2,000 single family houses with garden space and you have 2,001 billionaires who want them, then you're going to continue to see ever-escalating bidding wars.  The vast majority of the population can sit and spin, bc they just don't matter.

The larger a city's population gets in relation the number of available detached single family residences, the smaller the percentage of top income earners becomes that are even in contention to buy, sliding up into an ever-smaller corner of the income distribution's top-end tail.  In economically successful major urban areas, populations tend to swell even as the city's richest folks get more and more relatively richer than all of those new people, feeding this runaway feedback loop on house prices.   

Places like Seattle aren't even that bad yet!  Average house prices are still less than 8x the median family income in Seattle.  Some California cities like Palo Alto, by contrast, have median home prices that are well above 20x their median income, because they have a minority of super-wealthy residents who compete for limited housing supply.  Vancouver BC is somewhere in between (about 13.5x).  Those prices have been bid up that high by buyers, not by average households, but by strong competitive demand from the wealthiest households competing for limited properties.

How can there be 10x the people as homes? How can a city function if that's the case? So the top 10% have a roof, and the other 90% are homeless? I'm not sure how that works. Almost by definition there has to be an equal number of dwellings as people - unless of course you're talking about physical houses only, in which case that hardly changes anything given that the crazy price/income or price/rent ratios have extended all the way to the very bottom of the market. Unless you consider a 300 sq ft condo (that is still going for over $1000/sq ft) the epitome of the good life. Something like 70% of Canadians own their own homes now according to the stats, so I think it's perfectly reasonable to talk about the median home and the median income because the 10+ Price/Income ratios are seen across the entire spectrum of the market in some cities. I would consider a 300 sq ft market to be the absolute bottom of the RE ladder, and when you need almost 2x the average Canadian income to maintain the historically sensible ratio of about 30% for housing costs, something is wrong. 

Simply stated, in certain cities there are almost zero dwellings in running the gamut from shoebox condo to 5br ocean front villa, that approach a reasonable financial metric - unless you factor in appreciation. Given (at least in Vancouver) that the median dwelling takes close to 100% of the average income, I'm not sure how physically people can buy.

And we already saw it play out a little in Toronto. People are so desperate to get into RE since they think it's no lose. They can't afford a median home, so they buy what they can - condos. This effected a pretty decent drop in house prices, while at the same time pushing up condo prices. You literally have above average people with above average incomes getting into bidding wars over below average places. 

[Jon Bon]

Care to share your numbers and rationale on that one? I know Canada is going to be different, but I'd like to know more about why folks are buying .3% properties.

0.3%? One can only wish...

Here's an article about 5 Vancouver properties renting in the 0.05-0.15%/month range.

https://vancouversun.com/news/local-news/five-metro-vancouver-mansions-being-rented-for-relatively-cheap-cheap-cheap

The reason is simple. Canada didn't see the huge declines that the US did in '08. An entire generation has only ever known RE to go up, and their idea of a "crash" is the period in '08 and home prices retracted like 10%, then quickly recouped it all 6 months later, and continued the upwards trajectory, peaking around 30% YoY gains. Given the short term memories of the average person, if 30% continued forever, then it really wouldn't matter that you're losing money every month, because that $5m home you just bought is appreciating at 125k per month. This can continue for a while (as it did), but once you approach 100% of your income to pay the mortgage/tax/insurance on the average dwelling, something has to give.

The other one I've read is a bit cultural. Canada has lots of immigrants, a huge number from South and Eastern Asia, a large proportion given out relatively small population. Over there I'm told from immigrant friends that RE is a bit of a racket, on average low wages make it impossible to get into, and landlords take all sorts of liberties that would be no where close to legal over here. Because of that, the culture is heavy into investing in RE, and sometimes try to play the same games as over there (ie my brother got 6 days notice to pack up and leave in the middle of a lease because the LL got a great unexpected offer on the condo).

So basically this then?

[Enigma]

I think there are a lot of factors that play into the 1% rule.

Let’s say someone can afford a $1500 rent/mortgage payment. 
-At 4% today over 30 years that is the same as buying a house around $300k.
The interest rate is currently going up.  Not saying to 80's and 90's rates where they were around 10%.

Supply & Demand.  I am starting to see lots of rentals going up in price as the supply shrinks.  Less individuals are buying house.

Plus increase in wages.  The push for $15 minimum wage had my dad stating that most people spend ROUGHLY 30% of their income on housing.  If they passed the push our rentals were going up.

Finally: Mentality - Millenials with high student debt, less pension options, high job turnover/moving...  They are forced to be renters and less likely to settle down and be homeowners.  At least that is the *feeling* that I have gotten over the countless articles. 

[K-ice]

Care to share your numbers and rationale on that one? I know Canada is going to be different, but I'd like to know more about why folks are buying .3% properties.

We liked the area (walk score 95+) & it was probably the most reasonably priced place at the time. We made a spread sheet of the 18 we visited including projected Reno’s, rents & expenses. Overall, it was the best deal. It also helps that the tenants pay the utilities. Once we bumped up the rents it was just cash flow positive. I think that is very important. I would not buy something I had to inject $ into every month. We keep a separate bank account for the rental so it’s easy to keep it separate. We’ve had to “loan” it money for 2 major repairs but it’s paid us back within 4-6 months. We’re happy if it can carry itself & break even. Any extra $ it’s makes goes towards its mortgage. Once the mortgage is paid it will provide about $15-20K a year.

It has appreciated a lot but we don’t plan to sell. I’ve had relatives regreat selling RE so my plan is to just make money off the rents.

[BicycleB]

You have a property that's cash flow positive even though the rent when you bought it was .3% of the purchase price?

Sorry if I missed this, but what % of purchase price is the monthly rent now?

Is it cash flow positive because you put down a large down payment, or was the bulk of the purchase paid by mortgage? 

I apologize if these are intrusive...just trying to understand.

[waltworks]

You have a property that's cash flow positive even though the rent when you bought it was .3% of the purchase price?

It's not, I'm sure. What K-Ice is probably saying is that the mortgage is less than the rent (hence the 2 repairs that already wiped out 4-6 months of profit each, probably no accounting for management or Capex or vacancy, etc).

Mortgage rates in Canada aren't fixed for long terms like in the US so if interest rates ever rise, oh man is the sh*t going to hit the fan. Of course, it could do that without mortgage rates rising too given the crazy valuations.

-W

[Jon Bon]

We liked the area (walk score 95+) & it was probably the most reasonably priced place at the time. We made a spread sheet of the 18 we visited including projected Reno’s, rents & expenses. Overall, it was the best deal. It also helps that the tenants pay the utilities. Once we bumped up the rents it was just cash flow positive. I think that is very important. I would not buy something I had to inject $ into every month. We keep a separate bank account for the rental so it’s easy to keep it separate. We’ve had to “loan” it money for 2 major repairs but it’s paid us back within 4-6 months. We’re happy if it can carry itself & break even. Any extra $ it’s makes goes towards its mortgage. Once the mortgage is paid it will provide about $15-20K a year.

It has appreciated a lot but we don’t plan to sell. I’ve had relatives regreat selling RE so my plan is to just make money off the rents.

I don't know that is common in Canada but it is absolutely bananas in the states. Breaking even means earning zero dollars correct? So that large down payment I assume you made is earning nothing for the 10-20 years while you are paying down the mortgage? So It will cash flow nothing, and you are banking on appreciation for all of your returns I assume. This feels insanely risky but you have done well so far? Is this type of speculation somewhat common in the big cities in Canada?

[Metalcat]

We liked the area (walk score 95+) & it was probably the most reasonably priced place at the time. We made a spread sheet of the 18 we visited including projected Reno’s, rents & expenses. Overall, it was the best deal. It also helps that the tenants pay the utilities. Once we bumped up the rents it was just cash flow positive. I think that is very important. I would not buy something I had to inject $ into every month. We keep a separate bank account for the rental so it’s easy to keep it separate. We’ve had to “loan” it money for 2 major repairs but it’s paid us back within 4-6 months. We’re happy if it can carry itself & break even. Any extra $ it’s makes goes towards its mortgage. Once the mortgage is paid it will provide about $15-20K a year.

It has appreciated a lot but we don’t plan to sell. I’ve had relatives regreat selling RE so my plan is to just make money off the rents.

I don't know that is common in Canada but it is absolutely bananas in the states. Breaking even means earning zero dollars correct? So that large down payment I assume you made is earning nothing for the 10-20 years while you are paying down the mortgage? So It will cash flow nothing, and you are banking on appreciation for all of your returns I assume. This feels insanely risky but you have done well so far? Is this type of speculation somewhat common in the big cities in Canada?

It is speculation and it is risky compared to investing, which is probably why I know very very few middle class people invested in rentals in Canada.

Most people I know invested in RE here either work in the RE industry, or are high net worth, looking to diversify, and have a high risk tolerance within this asset class.

I literally can't think of anyone middle class off the top of my head who owns a rental property in a Canadian city, other than some friends who have bought a house with a suite that they can rent out to offset the mortgage.

Otherwise, between 20% down, the housing prices in Canadian cities, and the variability of our mortgages, it's not at all the same kind of investment that it is in the US.

Also remember, we have only a small handful of major cities, which is where the vast majority of jobs are. So our urban real estate market is kind of nuts as a result.

My expected gains on my rental are entirely speculation, but given what's happening where I own, it's actually a pretty safe bet.

Based on the past decade, had we just left it empty, we would be close to breaking even if we sold today, and my area is just starting to heat up.

Something extremely strange would have to happen for me to lose money, again, even of I just left it empty, based on the plans the city has for my area.

Even then, I'm only invested to diversify beyond maxing my tax advantaged accounts and to lock in the relatively low prices here as rent control for my parents who will be my tenants. I don't even factor this property in to my retirement planning. It's basically just a bonus.

So yeah, it's a different world here.

[ChpBstrd]

Wild idea, but if all the world offers are bad investments whose revenue will never justify the price, perhaps don’t buy them? I remember forums in 1999 trying to justify dot com stocks based on fundamentals - I.e. why a 1000 PE was better than a negative PE.

The “everything bubble” is luring people into sucker bets based on FOMO, greater fool theory, and retirees’ requirement to generate income at any cost.

On a macro level, extreme concentrations of wealth have (1) raised demand for securities and (2) reduced the velocity of money to the point we have faced deflationary pressures for a decade despite historic low interest rates and falling unemployment. This “conundrum” is because those new quantitative easing dollars flowed into the portfolios of the wealthy, where they have hardly been cycled through the real economy, whereas lower income demographics would’ve spent extra cash the same day. The fed bought bonds, not products of labor such as infrastructure. The result was a bubble in all investable assets.

Breaking this cycle might involve (a) a reversal of quantitative easing that stresses the bubble to the point of breakage/panic, (b) a hyper-consumption binge by real-economy consumers that raises inflation, or (c) a contagious collapse in asset prices starting in any one sector as in 2008.

So yea, you don’t have to buy bad investments. Certainly not illiquid unhedge-able ones like physical real estate earning 2% per year plus whatever appreciation/depreciation greater-fool-theory delivers.

[Enough]

Wild idea, but if all the world offers are bad investments whose revenue will never justify the price, perhaps don’t buy them? I remember forums in 1999 trying to justify dot com stocks based on fundamentals - I.e. why a 1000 PE was better than a negative PE.

The “everything bubble” is luring people into sucker bets based on FOMO, greater fool theory, and retirees’ requirement to generate income at any cost.

On a macro level, extreme concentrations of wealth have (1) raised demand for securities and (2) reduced the velocity of money to the point we have faced deflationary pressures for a decade despite historic low interest rates and falling unemployment. This “conundrum” is because those new quantitative easing dollars flowed into the portfolios of the wealthy, where they have hardly been cycled through the real economy, whereas lower income demographics would’ve spent extra cash the same day. The fed bought bonds, not products of labor such as infrastructure. The result was a bubble in all investable assets.

Breaking this cycle might involve (a) a reversal of quantitative easing that stresses the bubble to the point of breakage/panic, (b) a hyper-consumption binge by real-economy consumers that raises inflation, or (c) a contagious collapse in asset prices starting in any one sector as in 2008.

So yea, you don’t have to buy bad investments. Certainly not illiquid unhedge-able ones like physical real estate earning 2% per year plus whatever appreciation/depreciation greater-fool-theory delivers.

+1. 

I feel the same way but couldn't express or explain it as well as you did.

[BicycleB]

Wild idea, but if all the world offers are bad investments whose revenue will never justify the price, perhaps don’t buy them? I remember forums in 1999 trying to justify dot com stocks based on fundamentals - I.e. why a 1000 PE was better than a negative PE.

The “everything bubble” is luring people into sucker bets based on FOMO, greater fool theory, and retirees’ requirement to generate income at any cost.

On a macro level, extreme concentrations of wealth have (1) raised demand for securities and (2) reduced the velocity of money to the point we have faced deflationary pressures for a decade despite historic low interest rates and falling unemployment. This “conundrum” is because those new quantitative easing dollars flowed into the portfolios of the wealthy, where they have hardly been cycled through the real economy, whereas lower income demographics would’ve spent extra cash the same day. The fed bought bonds, not products of labor such as infrastructure. The result was a bubble in all investable assets.

Breaking this cycle might involve (a) a reversal of quantitative easing that stresses the bubble to the point of breakage/panic, (b) a hyper-consumption binge by real-economy consumers that raises inflation, or (c) a contagious collapse in asset prices starting in any one sector as in 2008.

So yea, you don’t have to buy bad investments. Certainly not illiquid unhedge-able ones like physical real estate earning 2% per year plus whatever appreciation/depreciation greater-fool-theory delivers.

The "all investments are inflated" idea makes sense. I just haven't been able to predict what will happen.

For example, what if instead of a crash, various investments just slowly deliver poor returns? What if for several decades, interest rates and bonds oscillate between zero and 2% nominal, providing a 1% average loss relative to inflation, while stocks' fluctuation revolves around an average real return of 3%? We wouldn't need a special crash to deliver financial returns far lower than past eras.

I also can't figure out the best investment. Paying down debt seems relatively better than usual, but that implies leverage is a bad idea. Will real estate be better than other investments, meaning investors should buy a lot of it? Or will it fail to cover payments somehow, meaning investors should stay away?

For now I'm in real estate more than anything else, but with low leverage. Hard to know the right move.

[Another Reader]

Wild idea, but if all the world offers are bad investments whose revenue will never justify the price, perhaps don’t buy them? I remember forums in 1999 trying to justify dot com stocks based on fundamentals - I.e. why a 1000 PE was better than a negative PE.

The “everything bubble” is luring people into sucker bets based on FOMO, greater fool theory, and retirees’ requirement to generate income at any cost.

On a macro level, extreme concentrations of wealth have (1) raised demand for securities and (2) reduced the velocity of money to the point we have faced deflationary pressures for a decade despite historic low interest rates and falling unemployment. This “conundrum” is because those new quantitative easing dollars flowed into the portfolios of the wealthy, where they have hardly been cycled through the real economy, whereas lower income demographics would’ve spent extra cash the same day. The fed bought bonds, not products of labor such as infrastructure. The result was a bubble in all investable assets.

Breaking this cycle might involve (a) a reversal of quantitative easing that stresses the bubble to the point of breakage/panic, (b) a hyper-consumption binge by real-economy consumers that raises inflation, or (c) a contagious collapse in asset prices starting in any one sector as in 2008.

So yea, you don’t have to buy bad investments. Certainly not illiquid unhedge-able ones like physical real estate earning 2% per year plus whatever appreciation/depreciation greater-fool-theory delivers.

The "all investments are inflated" idea makes sense. I just haven't been able to predict what will happen.

For example, what if instead of a crash, various investments just slowly deliver poor returns? What if for several decades, interest rates and bonds oscillate between zero and 2% nominal, providing a 1% average loss relative to inflation, while stocks' fluctuation revolves around an average real return of 3%? We wouldn't need a special crash to deliver financial returns far lower than past eras.

I also can't figure out the best investment. Paying down debt seems relatively better than usual, but that implies leverage is a bad idea. Will real estate be better than other investments, meaning investors should buy a lot of it? Or will it fail to cover payments somehow, meaning investors should stay away?

For now I'm in real estate more than anything else, but with low leverage. Hard to know the right move.

Right now, the best investment I see is deleveraging any real estate financed at 5 percent or more.  Even after tax considerations, the de-risking adds some value.  That and a nice pile of cash in case this all turns out to be smoke and mirrors when the Chinese government pulls the rug out from under the flow of money out of China.  I kind of think they won't, because they want to acquire a big, fat piece of the USA pie.  If not directly, then indirectly through having Chinese citizens and their money move here or at least acquire US assets.

[tralfamadorian]

That and a nice pile of cash in case this all turns out to be smoke and mirrors when the Chinese government pulls the rug out from under the flow of money out of China. 

I thought this was happening already?

[Another Reader]

That and a nice pile of cash in case this all turns out to be smoke and mirrors when the Chinese government pulls the rug out from under the flow of money out of China. 

I thought this was happening already?

Looks like some government-engineered braking, but the money is still flowing to the Bay Area and some parts of Southern California.

[waltworks]

Remember when Japan was buying all the big prestigious buildings in NYC?

Deja vu all over again...

-W

[K-ice]

You have a property that's cash flow positive even though the rent when you bought it was .3% of the purchase price?

Sorry if I missed this, but what % of purchase price is the monthly rent now?

Is it cash flow positive because you put down a large down payment, or was the bulk of the purchase paid by mortgage? 

I apologize if these are intrusive...just trying to understand.

So to clarify, I guess those first few months at 0.3% were not cash flow positive but we were hamstringed until the owner's son moved out. A below market rental for him for a few months was a condition on closing.  It made getting a mortgage a lot more challenging, as they weren't convinced of our projected income. After him and the woman above him were gone it was at 0.6%. Today it is at 0.9%.

We also self manage and do a lot of DIY. This also wasn't my partner's first rental property so we knew what we were getting into.

As I mentioned the tenants pay all the utilities, which helps keeps other monthly expenses lower. In a larger multi family, say 6 or 8 plex utilities can eat the rent from one entire suite every month. The assessed value was about 2/3 of the sale keeping the taxes lower. Aside from one month to turn over the suites that first time, we have had zero vacancy in 10 years.

I guess what I am trying to say is, yes you can buy something that is not 1%. But spread sheet as may details as possible and be sure it is cash flow positive with realistic projected rents.

[soccerluvof4]

To Waltworks earlier point about not being able to sell half these rental places similar but on a different note I believe this is what is going to be happening in a lot of areas where the house building is going crazy. I would be willing to bet in my area nobody that has a builder build there house is going to ever make money on them when they go to sell and be lucky if they don't lose money. Yes there will be the exception but I am talking most cases.