Author Topic: Is the 1% rule ever coming back?  (Read 21273 times)

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #100 on: April 30, 2019, 07:23:56 AM »
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.

You need to expense this at some chosen hourly rate (or just use what a management company would charge), not include it as part of your return. Unless you'd like to come manage rentals for me for free...

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theoverlook

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Re: Is the 1% rule ever coming back?
« Reply #101 on: April 30, 2019, 08:11:24 AM »

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.


Are equities really that inflated? Yes, we've had some amazing returns the last ten years, but prior to that was one of the worst crashes in our lifetimes. It seems to me that the current valuation lines up pretty closely with historical averages. The S&P 500 average total return not adjusted for inflation from 1957 (year it was founded) to 2005 was 10.532%. From 1957 to 2019 was 10.151%. Seems to me that we could see "average" returns from here and it would be about "average." Am I missing something?

Jon Bon

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Re: Is the 1% rule ever coming back?
« Reply #102 on: April 30, 2019, 08:26:35 AM »

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.


Are equities really that inflated? Yes, we've had some amazing returns the last ten years, but prior to that was one of the worst crashes in our lifetimes. It seems to me that the current valuation lines up pretty closely with historical averages. The S&P 500 average total return not adjusted for inflation from 1957 (year it was founded) to 2005 was 10.532%. From 1957 to 2019 was 10.151%. Seems to me that we could see "average" returns from here and it would be about "average." Am I missing something?

They don't look to be on sale to me.

Source:https://www.multpl.com/shiller-pe




Seadog

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Re: Is the 1% rule ever coming back?
« Reply #103 on: April 30, 2019, 08:57:13 AM »

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.


Are equities really that inflated? Yes, we've had some amazing returns the last ten years, but prior to that was one of the worst crashes in our lifetimes. It seems to me that the current valuation lines up pretty closely with historical averages. The S&P 500 average total return not adjusted for inflation from 1957 (year it was founded) to 2005 was 10.532%. From 1957 to 2019 was 10.151%. Seems to me that we could see "average" returns from here and it would be about "average." Am I missing something?

They don't look to be on sale to me.

Source:https://www.multpl.com/shiller-pe

Right, certainly not on sale. But are we at the cusp of 1929 where we can expect an 80% crash, or are we in 1995 where we can expect them to advance 50% more?

theoverlook

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Re: Is the 1% rule ever coming back?
« Reply #104 on: April 30, 2019, 09:22:29 AM »

Are equities really that inflated?

They don't look to be on sale to me.

"Not inflated" is not a synonym for "on sale."

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #105 on: April 30, 2019, 10:26:52 AM »
Schiller PE will drop a LOT as the 2009 earnings go away. And it has all kinds of problems with accounting rule changes in the 80s and 90s.

Earnings per share are at all time highs right now too, so there's that.

IMO stocks are only about 15% overvalued. RE is more like 50% most places in the US.

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NorCal

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Re: Is the 1% rule ever coming back?
« Reply #106 on: April 30, 2019, 10:36:43 AM »
I honestly don't know how useful the 1% rule is in this interest rate environment.  I see the value of it in a guideline, but it's no more than that.  You actually have to do a cash-flow analysis these days.

I've considered jumping into RE, but do have a lot of the same concerns shared here.  When I look at my local market (Denver), numbers are very tight.  I could probably find a decent property with a cap rate in the 5.5%ish range.  While that isn't a great return, I'm not convinced the 10 year return on stocks will be any better than that.  They're over-valued in a similar way, it's just less obvious with a casual analysis.

I also think the Denver market still has plenty of room to appreciate.  I could easily see prices appreciating 50%-100% over the next decade.  I don't see this as a national trend though.  If this happens, gains from appreciation will easily outstrip gains from cash flow.

Other factors to consider:
1. The last recession was RE focused.  The next one probably won't be.  A recession similar to the dot-com bust or the 70's oil shock would look a lot different to RE than 2008.

Given the pros and cons, I'm still seeing RE as a decent (if not great) investment.  I would just be sure to build in a greater equity cushion today vs. 5 years ago.

I'd be curious to hear thoughts from more seasoned RE investors on this line of thinking.  I'm admittedly a market observer, and not a market participant.

YttriumNitrate

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Re: Is the 1% rule ever coming back?
« Reply #107 on: April 30, 2019, 10:37:20 AM »
Schiller PE will drop a LOT as the 2009 earnings go away. And it has all kinds of problems with accounting rule changes in the 80s and 90s.
Here's a fun tool you can use to play around with to create a Shiller PE with a custom time period:
https://dqydj.com/shiller-pe-cape-ratio-calculator/

Going to a shorter time period (e.g., 7 years and 7 months) for the Shiller PE doesn't appear to cause much of a drop.


Papa bear

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Re: Is the 1% rule ever coming back?
« Reply #108 on: April 30, 2019, 11:30:57 AM »
I honestly don't know how useful the 1% rule is in this interest rate environment.  I see the value of it in a guideline, but it's no more than that.  You actually have to do a cash-flow analysis these days.

I've considered jumping into RE, but do have a lot of the same concerns shared here.  When I look at my local market (Denver), numbers are very tight.  I could probably find a decent property with a cap rate in the 5.5%ish range.  While that isn't a great return, I'm not convinced the 10 year return on stocks will be any better than that.  They're over-valued in a similar way, it's just less obvious with a casual analysis.

I also think the Denver market still has plenty of room to appreciate.  I could easily see prices appreciating 50%-100% over the next decade.  I don't see this as a national trend though.  If this happens, gains from appreciation will easily outstrip gains from cash flow.

Other factors to consider:
1. The last recession was RE focused.  The next one probably won't be.  A recession similar to the dot-com bust or the 70's oil shock would look a lot different to RE than 2008.

Given the pros and cons, I'm still seeing RE as a decent (if not great) investment.  I would just be sure to build in a greater equity cushion today vs. 5 years ago.

I'd be curious to hear thoughts from more seasoned RE investors on this line of thinking.  I'm admittedly a market observer, and not a market participant.

I’ve always been confused by the Denver appreciation. Sure there are a lot of people moving there, but it’s surrounded by completely usable and buildable land.  Is there something keeping Denver from becoming a Dallas or Houston?  It doesn’t have the issues of being an island or peninsula.  And the mountains are only to the west, and are still more buildable than an ocean or lake.


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NorCal

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Re: Is the 1% rule ever coming back?
« Reply #109 on: April 30, 2019, 11:55:21 AM »
From a geographic standpoint, it's not constrained like the Bay Area.  Denver (but not Boulder) has also avoided the West Coast trap of restricting development.  So housing will continue to be built.  What I see in the local market:

1. There are a lot of gentrifying neighborhoods.  Places that used to be run down are turning into wonderful places to live.  While these areas have seen significant appreciation, there's still room for plenty more.
2.  The available land for building is not in great spots compared to the employment centers (for the most part).  Living somewhere accessible to downtown or Denver Tech Center will become more valuable as population increases and traffic increases.
3.  Local investment in major employment centers continues faster than housing stock can keep pace.  There's a massive new resort/convention center that just opened, the airport is going through a major expansion, and big companies continue to relocate offices here.
4.  Similar to the national trend, home construction is focused on the high-end + downtown luxury apartments.  Adding additional housing stock in the $500K-$1M range won't be a major factor in how a typical rental property is priced.

I could be totally wrong on this one.  I absolutely see the potential for it, but that's no guarantee the appreciation will happen.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #110 on: April 30, 2019, 02:52:16 PM »
Schiller PE will drop a LOT as the 2009 earnings go away. And it has all kinds of problems with accounting rule changes in the 80s and 90s.
Here's a fun tool you can use to play around with to create a Shiller PE with a custom time period:
https://dqydj.com/shiller-pe-cape-ratio-calculator/

Going to a shorter time period (e.g., 7 years and 7 months) for the Shiller PE doesn't appear to cause much of a drop.

Yes, quite a bit of the drop already happened (CAPE was at around 34 as of a year ago, I think).

My personal feeling is that after accounting for accounting changes and our era of buybacks happening instead of dividends, a "fair value" CAPE would be in the low to mid 20s - not the historical ~15. So stocks are expensive, but not crazy expensive.

RE, on the other hand, I got completely out of last year. Valuations are nutso and EVERYONE has a story about how their neighborhood is different/special... I remember how that turned out last time.

-W

ChpBstrd

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Re: Is the 1% rule ever coming back?
« Reply #111 on: May 01, 2019, 06:41:43 AM »
Schiller PE will drop a LOT as the 2009 earnings go away. And it has all kinds of problems with accounting rule changes in the 80s and 90s.
Here's a fun tool you can use to play around with to create a Shiller PE with a custom time period:
https://dqydj.com/shiller-pe-cape-ratio-calculator/

Going to a shorter time period (e.g., 7 years and 7 months) for the Shiller PE doesn't appear to cause much of a drop.

Yes, quite a bit of the drop already happened (CAPE was at around 34 as of a year ago, I think).

My personal feeling is that after accounting for accounting changes and our era of buybacks happening instead of dividends, a "fair value" CAPE would be in the low to mid 20s - not the historical ~15. So stocks are expensive, but not crazy expensive.

RE, on the other hand, I got completely out of last year. Valuations are nutso and EVERYONE has a story about how their neighborhood is different/special... I remember how that turned out last time.

-W

Why would doing stock buybacks rather than paying dividends justify a higher PE ratio? The tax disadvantages of dividends wouldn't move the needle that much, right?

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #112 on: May 01, 2019, 07:22:48 AM »

ChpBstrd

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Re: Is the 1% rule ever coming back?
« Reply #113 on: May 02, 2019, 01:05:21 PM »
Buybacks aren't counted the same way at all.

https://seekingalpha.com/article/4086385-shiller-p-e-comparisons-distorted-buybacks

-W

That was an interesting read and thanks for sharing it. However, if I take the current CAPE of 30.74 and, per the author’s advice, chop off 15% to account for buybacks, I still arrive at a historically high 26.13 which implies a sub-4% earnings yield. The author’s points about interest rates and index funds are unconvincing as arguments why stocks are fairly valued even if they are the rationales driving investor behavior. Inflation and interest rates can change rapidly, and the big institutions which control the vast majority of shares have always been able to diversify.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #114 on: May 02, 2019, 02:07:34 PM »
Buybacks aren't counted the same way at all.

https://seekingalpha.com/article/4086385-shiller-p-e-comparisons-distorted-buybacks

-W

That was an interesting read and thanks for sharing it. However, if I take the current CAPE of 30.74 and, per the author’s advice, chop off 15% to account for buybacks, I still arrive at a historically high 26.13 which implies a sub-4% earnings yield. The author’s points about interest rates and index funds are unconvincing as arguments why stocks are fairly valued even if they are the rationales driving investor behavior. Inflation and interest rates can change rapidly, and the big institutions which control the vast majority of shares have always been able to diversify.

Gotta do another 10% or so for the various accounting changes that have happened since the 1980s, though.

More fun reading:
https://www.philosophicaleconomics.com/2013/12/shiller/

Again, I think stocks are overvalued right now myself. But I don't think they're *crazy* overvalued as the CAPE numbers suggest, because I don't think the CAPE numbers from 1870-1980 or so are directly comparable.

-W

sol

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Re: Is the 1% rule ever coming back?
« Reply #115 on: May 02, 2019, 07:51:49 PM »
Again, I think stocks are overvalued right now myself. But I don't think they're *crazy* overvalued as the CAPE numbers suggest, because I don't think the CAPE numbers from 1870-1980 or so are directly comparable.

Stocks are always valued based on investors' expectations of future earnings compared to today's price, right?  CAPE necessarily uses past earnings, not forward earnings.  That's how we end up in situations like this one, where CAPE is high because future expectations of corporate profits are much higher than the recent actual earnings. 

From one point of view, that should be a good thing.  It means whatever problems we had are resolved and everyone is expecting great things to happen in the future.  The fact that some grumpy internet guys are unhappy that everyone else is happy doesn't mean the market is going to crash.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #116 on: May 03, 2019, 11:37:09 AM »
Sol, agreed. There's a numerator and a denominator in these measures, which people seem to forget a lot.

If we see wages keep going up, earnings can catch up with prices some. Maybe. Should I say something about a permanently high plateau now? :)

-W

sol

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Re: Is the 1% rule ever coming back?
« Reply #117 on: May 03, 2019, 11:54:22 AM »
Should I say something about a permanently high plateau now? :)

There's an argument to be made, I think, that the internet has made investing much easier.  There is much more general knowledge out there about stock investing these days, participating in the market is easier than ever, mutual funds have damped the volatility, and awareness of the potential benefits is more widely publicized.  Basically, more people are investing in the market today than ever before, which means more money is being funneled into the markets than ever before.  That drives up prices, which lowers dividend rates and pushes up CAPE ratios.  People are willing to pay more for less, because there is so much loose money sloshing around these days.  America is prosperous, and we like to invest that surplus in our own future.

So yea, maybe CAPE of 30 is just the new normal.  We no longer have to call a broker who goes to the floor and shouts out your buy order looking for a seller.  There are so many more players now, and so much more professional analysis, that the whole investing world just moves faster and gets bigger.

The real threat to this trend, as is always the case in these situations, is a loss of confidence.  We've raised entire generations of Americans who thought the stock market was a sucker's bet, a rigged scam designed to get you to remortgage the farm.  Those folks refused to put their money into capitalism, and their refusal helped keep prices low for a long time.  I guess we could have had a repeat of that failure, after 2009, but millenials still seem just as entranced by the easy money now as my parents were in the 80s.  As far as I can see, confidence in the markets is high and that probably means prices will stay inflated until the bears convince everyone to put their money somewhere else.

tedman

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Re: Is the 1% rule ever coming back?
« Reply #118 on: May 03, 2019, 01:44:14 PM »
Lots of Walt quotes in thread

-W

So if you were a hypothetical 35 year old man who has been saving money in his Roth for years in case he ever saw “that” property but never saw one from 2011-2014 in a local RE area he understood, and now prices just seem outrageous... would you just keep trucking in stocks and just try to be ready next time? Granted I live in NYC, but I can’t seem to decide is it that the older wealthy people I know have real estate beyond their primary and that made them wealthy, or they were wealthy regardless and diversified.

My Roth is my emergency/play/etc fund invested in 100% stocks. I don’t expect things to be perfect, but I feel like I was overly cautious and now around here you’re playing the appreciation gamble.

CM Raymond

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Re: Is the 1% rule ever coming back?
« Reply #119 on: May 06, 2019, 10:42:00 AM »
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.

Rustbelter chiming in:

We bought a decent little duplex earlier in the year for $48k.
Rents are $600 for one side (long term tenant--does grass and snow removal) and $700 on the other (including pet fee).

This puts it at 2.71%.

I expect to put $3,000 into the place by the end of the year. Even that puts us at 2.55%

In the final stages of closing on financing for a commercial building: storefront with triplex.
Cost is $71,500.
Three units are totally refurbished and rent for $725 (average).

3.04% without the storefront rented.

Many believe that being close to Pittsburgh, and with new industry moving in, that we will see some significant appreciation over the next decade, but even without it, I'm a happy camper.

Only problem is... deals are getting harder to grab with you out-of-staters jumping into our county!

« Last Edit: May 06, 2019, 10:48:25 AM by CM Raymond »

Enigma

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Re: Is the 1% rule ever coming back?
« Reply #120 on: May 07, 2019, 07:47:42 AM »
Volunteer State (TN) chiming in (1% rule still applies):

I have bought plenty of multiunit (3plx/4plx) around 30-40k per door when rents were around 450-595

Currently the market is still pretty hot but the units are now around 55-65k per door and rents have gone up to around 650-700 per unit.

The thought is being close to Nashville the market is getting hotter.  Many companies appear to be moving to the area.  Maybe more lax ‘Right-To-Work’ laws, no personal state income taxes, and politics have played a role.

Jon Bon

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Re: Is the 1% rule ever coming back?
« Reply #121 on: May 07, 2019, 07:55:28 AM »
Volunteer State (TN) chiming in (1% rule still applies):

I have bought plenty of multiunit (3plx/4plx) around 30-40k per door when rents were around 450-595

Currently the market is still pretty hot but the units are now around 55-65k per door and rents have gone up to around 650-700 per unit.

The thought is being close to Nashville the market is getting hotter.  Many companies appear to be moving to the area.  Maybe more lax ‘Right-To-Work’ laws, no personal state income taxes, and politics have played a role.

What type of neighborhood?

I could probably still find them in C neighborhoods, but that's section 8 with people stealing your appliances when they move out. No thanks. We used to have them in B neighborhoods and A if you looked hard enough.

I know Nashville has been bananas with its growth so I would expect anything in the city to be no where close to 1%?



waltworks

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Re: Is the 1% rule ever coming back?
« Reply #122 on: May 07, 2019, 08:01:40 AM »
For reference, most old-school RE investors will look for 1.5-2% when looking at multifamily, for a variety of reasons.

So if you're getting 1% on multifamily, you are again not getting a great deal compared to historical price/rent ratios.

-W

Enigma

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Re: Is the 1% rule ever coming back?
« Reply #123 on: May 07, 2019, 08:10:18 AM »
What type of neighborhood?
I could probably still find them in C neighborhoods, but that's section 8 with people stealing your appliances when they move out. No thanks. We used to have them in B neighborhoods and A if you looked hard enough.
I know Nashville has been bananas with its growth so I would expect anything in the city to be no where close to 1%?
Clarksville area 40 minutes from Nashville (Clarksville Exits 1 thru 11 of I-24) (Nashville starting at exit 44)
Clarksville was once just a military city (Fort Campbell) but has changed drastically with the base scaling down over the years.  But industry and Nashville's expansion has been boosting the economy almost overnight.

For reference, most old-school RE investors will look for 1.5-2% when looking at multifamily, for a variety of reasons.
So if you're getting 1% on multifamily, you are again not getting a great deal compared to historical price/rent ratios.-W
I have learned that investing in a house vs multiunit are two different animals.  My profit margin is MUCH higher on a multiunit than it is a single-family house (SFH).  The cost savings of fixing one thing are multiplied.  For example, replacing 4 SFH roofs costs more than one roof for a 4-plex.  Even when it comes to replacing appliances/air conditioner/hot water heater that cost is divided over multiple units.

clifp

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Re: Is the 1% rule ever coming back?
« Reply #124 on: May 26, 2019, 01:19:10 PM »
I have bought 5 places near Independence MO and one place in Bullhead Arizona in the last few years.  Prices ranging for 40K to 110K 3 are duplex and 3 are single family rents range from a low of $550 to a high of $800.  So somewhere between 1.3-1.7%/month. 

I read Mayor Pete book and his mortgage is $450/month.  He's fixed his place up but looking at rentals in South Bend, IN, I bet he could rent it for 1500-2K a month that's a pretty nice return. I found 4 places in South Bend, on the first two pages of Zilliow that were well above the 1% rule.  I was recently on a Costa Rican tour with folks from IA, PA, OH, WI, ID, and rural IL, and TX and everyone of them had real estate that was 1% rule. 

My SWAG (scientific wild ass guess) is that you give find rentals in parts of 30 out of the 50 states. that meet the rule.  Pretty much everything below the Mason-Dixon like excepting VA.  The whole rust belt, small city Texas, except for Austin suburbs and maybe Dallas or Houston suburbs.  The plains states, scattered places in NM, AZ, UT, and NV.  Where I don't think you can find 1% places is the West Coast, New England, and most of the Atlantic states, and most cities with a population over 1 million.  Although I'm far less certain my 1,000,000 population claim.


tralfamadorian

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Re: Is the 1% rule ever coming back?
« Reply #125 on: May 26, 2019, 01:41:45 PM »
My SWAG (scientific wild ass guess)

I love this.

BicycleB

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Re: Is the 1% rule ever coming back?
« Reply #126 on: May 26, 2019, 02:28:57 PM »
I have bought 5 places near Independence MO and one place in Bullhead Arizona in the last few years.  Prices ranging for 40K to 110K 3 are duplex and 3 are single family rents range from a low of $550 to a high of $800.  So somewhere between 1.3-1.7%/month. 

I read Mayor Pete book and his mortgage is $450/month.  He's fixed his place up but looking at rentals in South Bend, IN, I bet he could rent it for 1500-2K a month that's a pretty nice return. I found 4 places in South Bend, on the first two pages of Zilliow that were well above the 1% rule.  I was recently on a Costa Rican tour with folks from IA, PA, OH, WI, ID, and rural IL, and TX and everyone of them had real estate that was 1% rule. 

My SWAG (scientific wild ass guess) is that you give find rentals in parts of 30 out of the 50 states. that meet the rule.  Pretty much everything below the Mason-Dixon like excepting VA.  The whole rust belt, small city Texas, except for Austin suburbs and maybe Dallas or Houston suburbs.  The plains states, scattered places in NM, AZ, UT, and NV.  Where I don't think you can find 1% places is the West Coast, New England, and most of the Atlantic states, and most cities with a population over 1 million.  Although I'm far less certain my 1,000,000 population claim.

There are 1% rule properties inside Austin?

tralfamadorian

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Re: Is the 1% rule ever coming back?
« Reply #127 on: May 26, 2019, 02:53:01 PM »
I have bought 5 places near Independence MO and one place in Bullhead Arizona in the last few years.  Prices ranging for 40K to 110K 3 are duplex and 3 are single family rents range from a low of $550 to a high of $800.  So somewhere between 1.3-1.7%/month. 

I read Mayor Pete book and his mortgage is $450/month.  He's fixed his place up but looking at rentals in South Bend, IN, I bet he could rent it for 1500-2K a month that's a pretty nice return. I found 4 places in South Bend, on the first two pages of Zilliow that were well above the 1% rule.  I was recently on a Costa Rican tour with folks from IA, PA, OH, WI, ID, and rural IL, and TX and everyone of them had real estate that was 1% rule. 

My SWAG (scientific wild ass guess) is that you give find rentals in parts of 30 out of the 50 states. that meet the rule.  Pretty much everything below the Mason-Dixon like excepting VA.  The whole rust belt, small city Texas, except for Austin suburbs and maybe Dallas or Houston suburbs.  The plains states, scattered places in NM, AZ, UT, and NV.  Where I don't think you can find 1% places is the West Coast, New England, and most of the Atlantic states, and most cities with a population over 1 million.  Although I'm far less certain my 1,000,000 population claim.

There are 1% rule properties inside Austin?

Given that google tells me that Austin's population was 950k in 2017, OP most probably counted Austin in the 1mil+ category.

clifp

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Re: Is the 1% rule ever coming back?
« Reply #128 on: May 26, 2019, 03:27:04 PM »

Given that google tells me that Austin's population was 950k in 2017, OP most probably counted Austin in the 1mil+ category.

Mind you Austin, is the only major Texas city I've never been to, but I'd be shocked if you could find many (any?) 1% rule places there. 

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #129 on: May 26, 2019, 04:24:52 PM »
There is not 1% rule RE available in UT. Full stop.

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Papa bear

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Re: Is the 1% rule ever coming back?
« Reply #130 on: May 26, 2019, 07:08:56 PM »
I have bought 5 places near Independence MO and one place in Bullhead Arizona in the last few years.  Prices ranging for 40K to 110K 3 are duplex and 3 are single family rents range from a low of $550 to a high of $800.  So somewhere between 1.3-1.7%/month. 

I read Mayor Pete book and his mortgage is $450/month.  He's fixed his place up but looking at rentals in South Bend, IN, I bet he could rent it for 1500-2K a month that's a pretty nice return. I found 4 places in South Bend, on the first two pages of Zilliow that were well above the 1% rule.  I was recently on a Costa Rican tour with folks from IA, PA, OH, WI, ID, and rural IL, and TX and everyone of them had real estate that was 1% rule. 

My SWAG (scientific wild ass guess) is that you give find rentals in parts of 30 out of the 50 states. that meet the rule.  Pretty much everything below the Mason-Dixon like excepting VA.  The whole rust belt, small city Texas, except for Austin suburbs and maybe Dallas or Houston suburbs.  The plains states, scattered places in NM, AZ, UT, and NV.  Where I don't think you can find 1% places is the West Coast, New England, and most of the Atlantic states, and most cities with a population over 1 million.  Although I'm far less certain my 1,000,000 population claim.
The OP is in a “rust belt” state.   Some areas are .5% rent to sale price.  I can still find some 1% rule properties but it is exceedingly difficult in any of the big cities and A/B locations. 


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Papa bear

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Re: Is the 1% rule ever coming back?
« Reply #132 on: May 26, 2019, 08:36:55 PM »
We talked about this upthread.  Those C area properties, like very rural, low income, or “bad” neighborhoods, used to be 2% rule properties.  You probably wouldn’t do well with those places unless it could turn 800+.




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waltworks

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Re: Is the 1% rule ever coming back?
« Reply #133 on: May 26, 2019, 08:39:50 PM »
Bwahaha.... not familiar with Carbon county... you know how all those coal fired plants are getting retired?

Yeah.

You would get eaten alive. Perhaps literally.

Look, at the very low end, you need WAY more than 1% rule. I would not take that place for FREE. Repeat: you cannot give me that property.

-W

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Re: Is the 1% rule ever coming back?
« Reply #134 on: May 26, 2019, 08:50:43 PM »
Bwahaha.... not familiar with Carbon county... you know how all those coal fired plants are getting retired?

Yeah.

You would get eaten alive. Perhaps literally.

Look, at the very low end, you need WAY more than 1% rule. I would not take that place for FREE. Repeat: you cannot give me that property.

-W
Pay me money or this property will show up in your stockings next Christmas.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #135 on: May 26, 2019, 09:50:39 PM »
I always think it's hilarious when there's an MLS listing that says it's an "investment opportunity" or something similar. You can literally just assume the opposite, pretty much every time. If it was an investment opportunity it wouldn't be on the MLS, folks.

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clifp

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Re: Is the 1% rule ever coming back?
« Reply #136 on: May 26, 2019, 09:51:16 PM »
Bwahaha.... not familiar with Carbon county... you know how all those coal fired plants are getting retired?

Yeah.

You would get eaten alive. Perhaps literally.

Look, at the very low end, you need WAY more than 1% rule. I would not take that place for FREE. Repeat: you cannot give me that property.

-W

If it was a good investment wasn't the question or the claim. I simply said you can find properties in"scattered places in UT" that hit the 1% rule.   You said no, full stop.  I spent 10 minutes on Zillow and found a few and showed you two.

I totally get that 1% is just a guideline it doesn't guarantee a good investment.  Quite frankly,  missed out on a lot of money, because I've steadfastly avoided buying rental properties where I've lived in the SF Bay area and Honolulu which has never been close to the 1% rule, but it didn't matter because of the tremendous price appreciation over the last 30+ year.  On the other hand, I feel pretty strongly that if you do buy a 1% property and are willing to hang onto it for at least 10 years, your after-tax returns will be north of 5% and with smart leverage near 10%


Neighborhoods change and even if they are bad they can still appreciate.  3 out of the 5 properties I bought in Vegas were in bad neighborhoods and two I think still are but in the last 3.5-8 years they've averaged 16% CAGR price appreciation and rents are up 30-50%.  Since Vegas properties are no longer close to 1% I've stopped buying there.. Sure, Carbon County, UT is probably a shit hole, and for all I know may stay that way forever, but being a slumlord can be profitable.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #137 on: May 26, 2019, 09:57:55 PM »
Look, Clif, everyone who bought anything in the last decade did great. A blind monkey could have made money investing in Vegas, or basically anywhere, 5-8 years ago. That doesn't mean squat going forward, nor does it mean you/me/anyone is some kind of RE genius because they did well. I'm FIRE because of RE appreciation/dumb luck, but that doesn't mean I tell people to go start buying places today to do what I did.

Can you find run down shacks in dead end places that you'll lose your shirt on that make the 1% rule? Yes. All over the place. So you're technically correct. Good work. Go stop by East Carbon (it's on the way to Moab if you fly into SLC!) sometime and report back. Nothing says investment opportunity like a WW2-era company coal mining town that is half the size it was 30 years ago.

Here's the thing - and I've posted this before, but I'll post it again. The 1% rule is useless at the very low end, because overhead (maintenance, especially) just doesn't scale down. A $20k SFH costs less to maintain (assuming you can find someone to do the work) than a $200k SFH - but not 90% less. Management costs aren't going to go below a certain level, so your 10% for management number has to get revised up a lot, insurance for C/D/F neighborhoods can be crazy expensive relative to the value of the house, and you start running risks of tenants committing major crimes/rendering the place uninhabitable. I could go on and on.

Your costs can only go so low at the low end and you'll lose your shirt if you assume that $200 a month for that $20k house is going to make you money. And of course, in this particular case you might not be able to rent the house at ANY price going forward, since the mines are in the process of shutting down.

-W
« Last Edit: May 26, 2019, 10:06:44 PM by waltworks »

clifp

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Re: Is the 1% rule ever coming back?
« Reply #138 on: May 27, 2019, 12:49:09 AM »
I don't claim be a real estate investing genius, or hell even very good at real estate investing.  As you say any idiot could have made money buying in Vegas (or most other places in the country) over the last decade.

I do claim to be a pretty good overall investor because I'm willing to look at all kinds of asset classes and make judgments that say this asset class is cheap on both relative and absolute basis.
Nobody thought I was smart buying TIPs with near 4% yields in 1999 and 2000 when the typical internet stocks were going up 5% a month.  Lots of folks ignored me when I said Dec.2008 and through the spring of 2009 that stocks were super cheap.  Plenty of people thought I was crazy buying in Vegas in 2010. It took a full year to get an accepted offer because the banks REO department were overwhelmed.  In 2010, Vegas was filled with deserted neighborhoods, with foreclosed and vandalize homes and prices continued to drop. I think what made buying these asset classes at the time a smart decision, wasn't because they did particularly well, but because my downside risk was low.

Before I buy any asset, I ask myself one simple question, will the income from this asset be highly likely to support a 4% withdrawal without drawing down the principal?  For 4% TIPs bonds, the answer was unless Uncle Sam, hell yes.  The PE and dividend rates of stock back in 2008-9 also meet these criteria.  This has not been true of fixed income for a long time.  I'm very nervous if this will be true of equities over the next decade or two, and the same thing is true for real estate in expensive areas.  I'm still comfortable recommending real estate that meets the 1%, although the 1% rule should be a starting point, not the sole criteria for investing in RE, because it is very likely to support a 4% withdrawal rate.

Another Reader

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Re: Is the 1% rule ever coming back?
« Reply #139 on: May 27, 2019, 06:50:22 AM »
I don't claim be a real estate investing genius, or hell even very good at real estate investing.  As you say any idiot could have made money buying in Vegas (or most other places in the country) over the last decade.

I do claim to be a pretty good overall investor because I'm willing to look at all kinds of asset classes and make judgments that say this asset class is cheap on both relative and absolute basis.
Nobody thought I was smart buying TIPs with near 4% yields in 1999 and 2000 when the typical internet stocks were going up 5% a month.  Lots of folks ignored me when I said Dec.2008 and through the spring of 2009 that stocks were super cheap.  Plenty of people thought I was crazy buying in Vegas in 2010. It took a full year to get an accepted offer because the banks REO department were overwhelmed.  In 2010, Vegas was filled with deserted neighborhoods, with foreclosed and vandalize homes and prices continued to drop. I think what made buying these asset classes at the time a smart decision, wasn't because they did particularly well, but because my downside risk was low.

Before I buy any asset, I ask myself one simple question, will the income from this asset be highly likely to support a 4% withdrawal without drawing down the principal?  For 4% TIPs bonds, the answer was unless Uncle Sam, hell yes.  The PE and dividend rates of stock back in 2008-9 also meet these criteria.  This has not been true of fixed income for a long time.  I'm very nervous if this will be true of equities over the next decade or two, and the same thing is true for real estate in expensive areas.  I'm still comfortable recommending real estate that meets the 1%, although the 1% rule should be a starting point, not the sole criteria for investing in RE, because it is very likely to support a 4% withdrawal rate.

I don't know clifp personally, but he has been around investing forums for many years and I will vouch for his knowledge and skill.  Arebelspy does know him IIRC and can chime in with his opinion.  Clifp and I are in total agreement, and if you think about it, so is Warren Buffett. 

Personally, I don't believe the future is necessarily like the past.  All the FIREcalc and similar predictive models on which people rely depend on the future being like the past.  Mostly the post-WW2 past.  Heretic that I am, I would never be comfortable in today's world relying exclusively on the 4 percent rule on a portfolio of paper assets.  Too many people worldwide have too much cash and are chasing too few decent quality assets right now.  Real estate is overpriced in most markets as well.  At some point, this will change, probably because of a series of events we can't predict today.

Liquidation of income producing assets has never been my plan.  My plan was and is buy quality assets on sale and hold indefinitely.  Nothing has changed, except there is little to nothing to buy today that meets Clifp's and my criteria.

NorCal

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Re: Is the 1% rule ever coming back?
« Reply #140 on: May 27, 2019, 03:46:58 PM »
I don't claim be a real estate investing genius, or hell even very good at real estate investing.  As you say any idiot could have made money buying in Vegas (or most other places in the country) over the last decade.

I do claim to be a pretty good overall investor because I'm willing to look at all kinds of asset classes and make judgments that say this asset class is cheap on both relative and absolute basis.
Nobody thought I was smart buying TIPs with near 4% yields in 1999 and 2000 when the typical internet stocks were going up 5% a month.  Lots of folks ignored me when I said Dec.2008 and through the spring of 2009 that stocks were super cheap.  Plenty of people thought I was crazy buying in Vegas in 2010. It took a full year to get an accepted offer because the banks REO department were overwhelmed.  In 2010, Vegas was filled with deserted neighborhoods, with foreclosed and vandalize homes and prices continued to drop. I think what made buying these asset classes at the time a smart decision, wasn't because they did particularly well, but because my downside risk was low.

Before I buy any asset, I ask myself one simple question, will the income from this asset be highly likely to support a 4% withdrawal without drawing down the principal?  For 4% TIPs bonds, the answer was unless Uncle Sam, hell yes.  The PE and dividend rates of stock back in 2008-9 also meet these criteria.  This has not been true of fixed income for a long time.  I'm very nervous if this will be true of equities over the next decade or two, and the same thing is true for real estate in expensive areas.  I'm still comfortable recommending real estate that meets the 1%, although the 1% rule should be a starting point, not the sole criteria for investing in RE, because it is very likely to support a 4% withdrawal rate.

I don't know clifp personally, but he has been around investing forums for many years and I will vouch for his knowledge and skill.  Arebelspy does know him IIRC and can chime in with his opinion.  Clifp and I are in total agreement, and if you think about it, so is Warren Buffett. 

Personally, I don't believe the future is necessarily like the past.  All the FIREcalc and similar predictive models on which people rely depend on the future being like the past.  Mostly the post-WW2 past.  Heretic that I am, I would never be comfortable in today's world relying exclusively on the 4 percent rule on a portfolio of paper assets.  Too many people worldwide have too much cash and are chasing too few decent quality assets right now.  Real estate is overpriced in most markets as well.  At some point, this will change, probably because of a series of events we can't predict today.

Liquidation of income producing assets has never been my plan.  My plan was and is buy quality assets on sale and hold indefinitely.  Nothing has changed, except there is little to nothing to buy today that meets Clifp's and my criteria.

Well said.  That is very similar to my thoughts on the current markets, although you articulated it much better than I could.

Back-testing is useful to a point.  But never forget that most hedge funds that rely on back-testing market strategies don't do all that well.  Heck, there was a little hedge fund called Long Term Capital that relied exclusively on back-tested models developed by phd's.  Markets change over time in ways that are impossible to reliably predict.

There are also a decent number of things about the current market that are fundamentally different than prior market history.  Valuations are higher, interest rates are historically low (which increases valuations and decreases future returns), and dividend yields are pretty low compared to most of the markets history. 

I'm curious, where are you and Clifp putting excess capital these days?  I'm splitting mine between the markets and paying down the mortgage (3.875% risk free return).  I'm considering putting some capital in real estate for diversification.  Prices are higher than I think reasonable, but I don't see the risk/reward ratio as being materially worse than the equity markets.


Another Reader

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Re: Is the 1% rule ever coming back?
« Reply #141 on: May 27, 2019, 05:15:36 PM »
Well, I'm still dumping a couple of thousand a month into the stock market in taxable accounts.  That's a long term investment horizon thing, and I'm expecting most of those companies and their shares to last through the next disaster, whatever it may be.  I'm long retired, so nothing goes in to pre-tax accounts. At some point, the pre-tax accounts will have to be liquidated thanks to RMD's.

My biggest focus right now is paying off rental mortgages over 5 percent.  I have too many mortgages for most lenders to take on and then sell to Freddie/Fannie so refinancing these is almost impossible.  Although I qualify for Fannie Mae financing, the hits for rental mortgages beyond 6 make refinancing unattractive and few lenders want to be bothered anyway.  Reducing leverage when you expect the real estate and the rental markets to become more difficult and less profitable makes sense to me.

Finally, I am hoarding some cash.  My guess is assets will go on sale at some point and it will be helpful to have the cash to buy.  No one can predict what assets will go on sale or when, but being ready to take advantage of the market, while possibly costing some returns for now, will likely pay off.


ChpBstrd

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Re: Is the 1% rule ever coming back?
« Reply #142 on: May 27, 2019, 08:39:31 PM »
So the argument is whether to:

a) Violate the 1% rule to buy rentals in economically vibrant areas, or
b) limit investments to C,D, and F neighborhoods where ROIs would be adequate if you were able to collect more than 6-7 months/year?

If these are truly the only options, the term "dry hole" might apply to real estate investing. If you already know your return will be awful, why make either bad decision? Why not load up in preparation for the upcoming fire sale?


waltworks

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Re: Is the 1% rule ever coming back?
« Reply #143 on: May 27, 2019, 09:01:11 PM »
Yeah, we might all be agreeing here - I have no rentals now. I won't buy any rentals at current prices either in desirable areas at .25% or in meth ghost towns for 1.5%. There is nothing on the open market that is appealing.

That said I'm FIRE so I'm not super concerned about it either way. If I was accumulating I would probably have a significant cash pile built up (~2% money market or CD, obviously, not just under the mattress) if I wanted to do RE going forward.

The 1% rule will be back, IMO. I won't dare guess when, though.

-W

NorCal

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Re: Is the 1% rule ever coming back?
« Reply #144 on: May 28, 2019, 10:01:19 AM »
So the argument is whether to:

a) Violate the 1% rule to buy rentals in economically vibrant areas, or
b) limit investments to C,D, and F neighborhoods where ROIs would be adequate if you were able to collect more than 6-7 months/year?

If these are truly the only options, the term "dry hole" might apply to real estate investing. If you already know your return will be awful, why make either bad decision? Why not load up in preparation for the upcoming fire sale?

I agree with both statements.  I've never invested in RE before, but am still heavily considering it.  I live in Denver, so my rough math puts cap rates on most properties I've looked at roughly in the 5-6% range, depending on assumptions.

The reasons I haven't fully given up on the idea of RE investing in this environment are:

1.  I expect the Denver housing market to continue to do better than the national housing market over the coming years.  This doesn't mean the national housing market won't suck.  I just expect Denver to continue doing well as a city.
2.  My other investments are in stocks.  If I wait for Real Estate to be on sale, the stocks in my portfolio will likely also be on sale.  I don't see a benefit to waiting.
3.  I would limit my leverage.  If I can get a pre-tax cash flow of 5-6% on a chunk of capital, I would probably still do better than the stock market.  And the higher cash flow on capital of real estate (compared to dividends) gives me more comfort in my portfolio withdrawal assumptions.

Now, I also get that these might be stupid justifications for overpaying.  I just don't see a lot of better places to put my money right now.

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Re: Is the 1% rule ever coming back?
« Reply #145 on: May 28, 2019, 11:50:34 AM »
So the argument is whether to:

a) Violate the 1% rule to buy rentals in economically vibrant areas, or
b) limit investments to C,D, and F neighborhoods where ROIs would be adequate if you were able to collect more than 6-7 months/year?

If these are truly the only options, the term "dry hole" might apply to real estate investing. If you already know your return will be awful, why make either bad decision? Why not load up in preparation for the upcoming fire sale?

I agree with both statements.  I've never invested in RE before, but am still heavily considering it.  I live in Denver, so my rough math puts cap rates on most properties I've looked at roughly in the 5-6% range, depending on assumptions.

The reasons I haven't fully given up on the idea of RE investing in this environment are:

1.  I expect the Denver housing market to continue to do better than the national housing market over the coming years.  This doesn't mean the national housing market won't suck.  I just expect Denver to continue doing well as a city.
2.  My other investments are in stocks.  If I wait for Real Estate to be on sale, the stocks in my portfolio will likely also be on sale.  I don't see a benefit to waiting.
3.  I would limit my leverage.  If I can get a pre-tax cash flow of 5-6% on a chunk of capital, I would probably still do better than the stock market.  And the higher cash flow on capital of real estate (compared to dividends) gives me more comfort in my portfolio withdrawal assumptions.

Now, I also get that these might be stupid justifications for overpaying.  I just don't see a lot of better places to put my money right now.

Math on that cap rate?

I'm seeing stuff with 0.5 to 0.6 percent rent as a percentage of value per month in the Phoenix market. Cap rates are in the threes with that rent to value...

ETA:  Free and clear cap rates are in the threes and leverage is negative.
« Last Edit: May 28, 2019, 01:12:07 PM by Another Reader »

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #146 on: May 28, 2019, 12:53:31 PM »
The only way something in Denver is going to get you 5-6% is with appreciation at this point, unless this is one of the ignore-maintenance/management/capex type things that people do when they want to talk themselves into a property.

-W

tralfamadorian

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Re: Is the 1% rule ever coming back?
« Reply #147 on: May 28, 2019, 08:14:27 PM »
+2
I would also like to see the math on 5-6% with limited leverage in Denver.

clifp

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Re: Is the 1% rule ever coming back?
« Reply #148 on: May 29, 2019, 12:36:05 AM »

I don't know clifp personally, but he has been around investing forums for many years and I will vouch for his knowledge and skill.  Arebelspy does know him IIRC and can chime in with his opinion.  Clifp and I are in total agreement, and if you think about it, so is Warren Buffett. 

Personally, I don't believe the future is necessarily like the past.  All the FIREcalc and similar predictive models on which people rely depend on the future being like the past.  Mostly the post-WW2 past.  Heretic that I am, I would never be comfortable in today's world relying exclusively on the 4 percent rule on a portfolio of paper assets.  Too many people worldwide have too much cash and are chasing too few decent quality assets right now.  Real estate is overpriced in most markets as well.  At some point, this will change, probably because of a series of events we can't predict today.

Liquidation of income producing assets has never been my plan.  My plan was and is buy quality assets on sale and hold indefinitely.  Nothing has changed, except there is little to nothing to buy today that meets Clifp's and my criteria.


Well thank you.  I should hasten to add that, if you're in your 20s or 30s who is LYBM in order to become FIRE, I don't think there is any wrong with index stock investing.  Virtuallly, all of my alternative investment require that I'm an accredited investor. (A million dollars in liquid asset or $300K income)  For me, it is partly because I find it intellectually stimulating to invest in different things, and also I just think it is prudent to diversify because there is so much cash chasing easy-to-buy assets. 

The largest and lowest risk investment was purchasing a stake in 16 medical office building in Toronto.  Now that Toronto RE market is also very high, but as the rich old guy who put the deal together said.  Canadian banks are better regulated, Canada has single-payer health care, which means that the Doctors are going to get paid, and so they can pay their rent.  He promised a 7% return and other than currency fluctuations it is been 7.02%   He should be the rents for every building for the next 10 years.

I also continue to invest in inexpensive homes in MO that meet the 1% rule.

I've supplied hard money lending on real estate. I get 10% plus 2 points for the loan, and this last one I'll also got a 1/4 of the profit, (which won't be that much)

I loan money to establish midsize business (revenue from 2-10 million). The business range from large local advertising/PR firm, to a company that runs head lice removal clinics, to a company that makes a high-tech Green fertilizer.  Every deal is different but typical I get 8-10% upfront interest and deferred interest of 8-10 after three to ten years.

Recently, I've been doing royalty deals like Kevin O'leary does on shark tank with post revenue starts.  The biggest investment has already return nearly 1/2 my money one year, the royalty stops when double my money which should happen 4 years, and then I have a small equity position.  On the other hand, my other royalty investment so far has returned a massive $13 after 6 months on a $25K investment.

I've also made about 25 Angel investment, I got very lucky in that 3rd investment I made was the most successful and made follow on investments, the returns from that have basically funded my other Angel investments.


I'm curious, where are you and Clifp putting excess capital these days?  I'm splitting mine between the markets and paying down the mortgage (3.875% risk free return).  I'm considering putting some capital in real estate for diversification.  Prices are higher than I think reasonable, but I don't see the risk/reward ratio as being materially worse than the equity markets.


ChpBstrd

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Re: Is the 1% rule ever coming back?
« Reply #149 on: May 29, 2019, 08:06:35 AM »
The only way something in Denver is going to get you 5-6% is with appreciation at this point, unless this is one of the ignore-maintenance/management/capex type things that people do when they want to talk themselves into a property.

-W

I believe the earlier poster is talking about leveraged ROI, not cap rate. E.g. your ROI on your 25% down payment.

 

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