Author Topic: Those who call the 1% rule garbage?  (Read 7915 times)

jeromedawg

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Those who call the 1% rule garbage?
« on: April 27, 2017, 04:20:39 PM »
Hey all,

I know there are some investors who consider the 1% rule garbage or not truly applicable. Can anyone elaborate more on this and why someone may or may not think the 1% (or 2% rule for that matter) makes any sense? It would be great to hear from both sides. This is more questioning those who have had great success with properties that are under 1% (e.g. investors in CA especially). It seems a lot of people use the 1% rule to 'quickly vet' potential properties and separate the wheat from the chaff. But it sounds like those of the different mindset aren't relying on this rule for anything, claiming that numbers are always more important (which I would agree with - final analysis is always important). But it seems they're implying that by using the 1% rule, you might be skipping over a real diamond in the rough - so what would be an example of a rental property that doesn't meet the 1-2% rule yet is performing great, cash-flowing, and appreciating? And more importantly, how are people finding these deals? Are these basically the distressed and off-market deals CA investors are able to obtain from private sellers at well-below market-value and without competition? Seems like a purple unicorn for buy and hold. 
« Last Edit: April 27, 2017, 04:31:48 PM by jplee3 »

redbirdfan

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Re: Those who call the 1% rule garbage?
« Reply #1 on: April 27, 2017, 04:44:51 PM »
It depends on what your goals are.  Properties in the South and Midwest may meet the 1% rule but may not offer much in the way of appreciation.  To use some actual numbers, it is not uncommon to see properties that can be purchased for $100,000 and rented for $1,000.  These properties are excellent for cash flow but may not be worth more than $100,000 3-7 years from now.   

On the coasts, properties that meet the 1% rule are like magical unicorns (outside of places purchased a long time ago or scooped up at the height of the financial crisis/real estate crash).  These properties may not have good cash flow numbers, and oftentimes don't break even.  I know many investors who buy these properties and rent them out for an amount that only (and barely) covers the mortgage payment with a 25% DP.  However, the properties tend to appreciate at 5%+ per year and the rents in these areas tend to increase at a good clip.  So, if you can buy a property, use the depreciation generated by the higher purchase price to offset your current income, rent the property to cover your mortgage, increase rents every year, and hold onto to the property for 5+ years, you can make a good profit.     

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #2 on: April 27, 2017, 04:55:13 PM »
There are really not 1% rule rentals in CA right now, AFAIK. Maybe if you're doing direct marketing and willing to take advantage of someone senile without any family to advise them or something, but any sort of legit route - no way.

That said, you can find 1% properties at the low end/C- neighborhood in, say, NJ that would look like:
Purchase price $75k
Gross rent $750/mo
Property taxes $3000/year (yes, that high)
Usual assumptions for 10% management, 10% vacancy, CapEx - call it $300-400/mo

If you paid cash for that property, your $75k investment is only generating $100-200/mo in profits, but with all sorts of potential for problems that would wipe out years of profits at once (major plumbing problem renders the place uninhabitable for a while, tenant sues, tenant damages property, etc). You're getting literally the same amount you could make just on dividends in an S&P500 index fund, but with many times the risk (and many times the headaches/stress).

On the other hand, you could find (here in UT, as of 5-7 years ago):
-Purchase price $150k
-Gross rents $1500/mo
-Property taxes $1500/year
-Management/Vacancy/Capex ~$500/mo (assume a similar structure so Capex is about identical)

Now you're profiting $800-900 per month on your $150k investment, so you're in spitting distance of S&P historical returns, which is probably the bare minimum you should accept.

So the 1% rule isn't set in stone, but my mythical UT property is a pretty good setup (low taxes, higher end neighborhood, etc) and it *still just barely matches the return from stocks*.

Note that I'm assuming nothing about appreciation (other than it'll match inflation) because historically this is what you expect. Over the last decade appreciation (from a very low trough) has been very high all over. That won't last, for reasons that should be obvious (eventually nobody can afford a house unless wages rise a lot). Appreciation is also a bitch because you pay a lot to get into a property up front, and then you also pay a bunch (fees, commissions, capital gains, etc) to get back out if you want to sell. Just to break even selling a place (that you don't live in to avoid capital gains) you probably need 15% appreciation!

That's why people use the 1% rule to weed out properties. It's a good rule of thumb to make sure you're not investing in something that is both riskier and has lower returns than a simple index fund.

-W
« Last Edit: April 27, 2017, 04:57:02 PM by waltworks »

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #3 on: April 27, 2017, 06:05:15 PM »
It depends on what your goals are.  Properties in the South and Midwest may meet the 1% rule but may not offer much in the way of appreciation.  To use some actual numbers, it is not uncommon to see properties that can be purchased for $100,000 and rented for $1,000.  These properties are excellent for cash flow but may not be worth more than $100,000 3-7 years from now.   

On the coasts, properties that meet the 1% rule are like magical unicorns (outside of places purchased a long time ago or scooped up at the height of the financial crisis/real estate crash).  These properties may not have good cash flow numbers, and oftentimes don't break even.  I know many investors who buy these properties and rent them out for an amount that only (and barely) covers the mortgage payment with a 25% DP.  However, the properties tend to appreciate at 5%+ per year and the rents in these areas tend to increase at a good clip.  So, if you can buy a property, use the depreciation generated by the higher purchase price to offset your current income, rent the property to cover your mortgage, increase rents every year, and hold onto to the property for 5+ years, you can make a good profit.   

So someone who might be arguing the "long game" for cash flow (which generally is what buy and holders should be doing anyway) might justify investing locally at higher expense, even if you live on the west or east coast, in favor of not having to deal with all the "headaches" of remotely managing OOS properties?
I just get thrown off and confused when someone says "the 1% rule is garbage - it's better to analyze the numbers correctly" without offering more details... ok, so if the 1% rule is garbage and you claim to be cash flowing on a .5% property - what math did you use and when?
I asked this to a 1% naysayer on BP and he came back at me like he was butt-hurt and didn't want to talk to me anymore (I guess it seemed like I was disagreeing with him). Either that and/or he didn't want to waste his time dealing with a 'bandwagon' investor who doesn't know what he's talking about (which is true because I'm just starting out trying to understand everything).

There are really not 1% rule rentals in CA right now, AFAIK. Maybe if you're doing direct marketing and willing to take advantage of someone senile without any family to advise them or something, but any sort of legit route - no way.

That said, you can find 1% properties at the low end/C- neighborhood in, say, NJ that would look like:
Purchase price $75k
Gross rent $750/mo
Property taxes $3000/year (yes, that high)
Usual assumptions for 10% management, 10% vacancy, CapEx - call it $300-400/mo

If you paid cash for that property, your $75k investment is only generating $100-200/mo in profits, but with all sorts of potential for problems that would wipe out years of profits at once (major plumbing problem renders the place uninhabitable for a while, tenant sues, tenant damages property, etc). You're getting literally the same amount you could make just on dividends in an S&P500 index fund, but with many times the risk (and many times the headaches/stress).

On the other hand, you could find (here in UT, as of 5-7 years ago):
-Purchase price $150k
-Gross rents $1500/mo
-Property taxes $1500/year
-Management/Vacancy/Capex ~$500/mo (assume a similar structure so Capex is about identical)

Now you're profiting $800-900 per month on your $150k investment, so you're in spitting distance of S&P historical returns, which is probably the bare minimum you should accept.

So the 1% rule isn't set in stone, but my mythical UT property is a pretty good setup (low taxes, higher end neighborhood, etc) and it *still just barely matches the return from stocks*.

Note that I'm assuming nothing about appreciation (other than it'll match inflation) because historically this is what you expect. Over the last decade appreciation (from a very low trough) has been very high all over. That won't last, for reasons that should be obvious (eventually nobody can afford a house unless wages rise a lot). Appreciation is also a bitch because you pay a lot to get into a property up front, and then you also pay a bunch (fees, commissions, capital gains, etc) to get back out if you want to sell. Just to break even selling a place (that you don't live in to avoid capital gains) you probably need 15% appreciation!

That's why people use the 1% rule to weed out properties. It's a good rule of thumb to make sure you're not investing in something that is both riskier and has lower returns than a simple index fund.

-W
Thanks for the examples. Are you also factoring the 50% rule into the equation? Or is that another generalized rule where you need to do more analysis beyond getting 'ballpark' figures? So given your two examples, which are below average and barely average (compared to the S&P500), what would you say would be an example of a *great* property to invest in? Is this where the rent would be even higher and or property taxes lower? Are there other factors that influence this besides lower purchase price and greater appreciation?
« Last Edit: April 27, 2017, 06:07:24 PM by jplee3 »

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #4 on: April 27, 2017, 06:31:55 PM »
My example was intended to demonstrate why the 1% rule is a *minimum* for a decent investment. The UT property example has quite low taxes, low CapEx/maintenance compared to rent (it's a relatively high end place), etc. And it still is *just barely acceptable* as compared to other investment options.

Back in the 2009 great time of RE milk and honey, you could get $40k properties that rented for $1000 a month in some places. Nuts.

Longterm RE investors ignore appreciation, because it's a fickle mistress and overall US RE prices have only matched inflation over the last 100 years. Folks who started doing RE stuff in the last 10 years or so often think otherwise. They are welcome to it, I'll wait for the next crash and buy their distressed properties from them all over again.

50% rule is another rule of thumb that is just used to eliminate crappy properties. Every property is a bit different so you have to run the numbers to really figure out what your profits (or losses) will be.

-W

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #5 on: April 27, 2017, 06:54:41 PM »
My example was intended to demonstrate why the 1% rule is a *minimum* for a decent investment. The UT property example has quite low taxes, low CapEx/maintenance compared to rent (it's a relatively high end place), etc. And it still is *just barely acceptable* as compared to other investment options.

Back in the 2009 great time of RE milk and honey, you could get $40k properties that rented for $1000 a month in some places. Nuts.

Longterm RE investors ignore appreciation, because it's a fickle mistress and overall US RE prices have only matched inflation over the last 100 years. Folks who started doing RE stuff in the last 10 years or so often think otherwise. They are welcome to it, I'll wait for the next crash and buy their distressed properties from them all over again.

50% rule is another rule of thumb that is just used to eliminate crappy properties. Every property is a bit different so you have to run the numbers to really figure out what your profits (or losses) will be.

-W

Thanks! So would the 2% come to mind when investing? Or is that just baloney? And what are your thoughts on flipping vs buy & hold? Flipping seems inherently riskier and with a lot more work involved. And on that note, as far as long term investing and appreciation, what's your perspective on BRRRR? Is that just playing with fire?

I echo you on waiting till the next crash to buy :) BTW: I read something somewhere about someone anticipating (or speculating) that soon we'll be seeing some distressed properties from those who got in just before the last crash and took 10yr ARMs where their payments have just increased. I wasn't paying attention back then but were a lot of people doing this?

What's your take on "forced appreciation" and "growth markets" btw?
« Last Edit: April 27, 2017, 08:14:44 PM by jplee3 »

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clarkfan1979

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Re: Those who call the 1% rule garbage?
« Reply #7 on: May 03, 2017, 04:26:55 PM »
In my opinion, the 1% rule is not garbage, but it doesn't tell the whole story. I wouldn't use the 1% rule as a screening tool, because I fear that I would miss out on a good deal.

I bought a 4 bed/2 bath college rental in Fort Collins, CO in May 2007 for 182K. It was a foreclosure. I fixed it up, mostly by myself for another 10K. Original market rent was around $1,350/month. I rented 3 rooms for $975/month and I lived in the 4th bedroom. I did that 2007 to 2011. I moved out in 2011 and rented the entire house out from 2011 to present.

Total original mortgage was $1040/month in 2007 at 6%. I refinanced in 2009 at 4.75%, reducing my total mortgage payment to $950/month.

Purchase price of 192K and rent for $1,350/month does not meet the 1% rule, so the rule is to pass. However, I did not.

The house is .6 miles away from a University with 25,000 students. Vacancy for the neighborhood is less than 1%. Because of the low vacancy rate of the neighborhood, it's very difficult if not impossible to meet the 1% rule.

It's rare for there to be a foreclosure so close to campus because the properties rent so easily. However, from what the neighbors told me the old owners went bankrupt with medical bills.

 I was happy that I ended up buying at the bottom of the market for the neighborhood. After repairs, I think I added 20K of sweat equity. Appreciation was pretty much flat from 2007 to 2011 and then things started to pick up.

In 2017, the University is now 32,000 students, the house is now worth around 350K and rents for $2200/month. Vacancy has been 0% for the past 10 years. Average tenant has been 2 years. I probably average $1500/year in repairs. A new football stadium (45,000 seats) is being completed August 2017. This will heavily impact the neighborhood rents. I think I will be around $2500/month in the next 2-3 years.

I didn't really follow the 1% rule and I have been very happy with my purchase.

Some claim that people who do not follow the 1% are doomed for failure and they will buy my property when I'm underwater and in foreclosure. However, I owe 112K on a 350K house. My rent is 2200/month and mortgage is 950/month. I also have 30K in cash. I would have more cash, but I have been using some of the cash flow to pay down my student loan debt. I feel pretty safe at 30K, so anything extra goes toward student loans.

How am I going to lose the house to foreclosure because I didn't follow the 1% rule?

 






waltworks

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Re: Those who call the 1% rule garbage?
« Reply #8 on: May 03, 2017, 09:53:56 PM »
Clark, like many people (including me) you were in the right place at the right time.

Run your numbers with no rental increases in 10 years and no appreciation over inflation, and a broken water heater that caused $10k in damages. Then compare to what you would have made in VTSAX or whatever.

There is nothing wrong with getting lucky. But getting lucky is not a plan.

-W

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #9 on: May 04, 2017, 12:33:02 AM »
Clark, like many people (including me) you were in the right place at the right time.

Run your numbers with no rental increases in 10 years and no appreciation over inflation, and a broken water heater that caused $10k in damages. Then compare to what you would have made in VTSAX or whatever.

There is nothing wrong with getting lucky. But getting lucky is not a plan.

-W

Thank you for this perspective. I keep hearing from people telling me to invest locally (because investing OOS is a PITA and totally not worth it at all because of long-distance landlording) because there are deals to be had in Southern California, even under 1%; you just have to be a really wise investor like they are and be able to find the deals because wise investors know how to find deals. Not particularly helpful advice, stating the obvious and providing no solutions other than "you should flip in CA and then wait for the market to crash to buy locally. just make sure not to go out of state" - flipping seems inherently high-risk and you can probably mitigate that risk if you partner with a seasoned investor/flipper but it's still not trivial. And I feel like telling someone to wait for the market to crash before buying (for the purpose of cash flow which is a long-game) is somewhat counterintuitive as it sounds a lot like trying to time the market. Even if/when the market crashes here in SoCal, I don't know how many great deals there would actually be for buy-hold cashflow. Seems more people would either be buying for appreciation and speculation or buying because they want to live in it. That said, what are your thoughts on investing OOS vs locally especially for buy and holds?
« Last Edit: May 04, 2017, 12:52:33 AM by jeromedawg »

Freedomin5

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Re: Those who call the 1% rule garbage?
« Reply #10 on: May 04, 2017, 01:29:16 AM »
It really depends on the math, but I think you're right, in HCOL areas it is possible to have a <1% cash flow property be a pretty good investment. It has worked in my case, probably because of the following environmental conditions:

- HCOL city
- very low vacancy rate
- good job market, especially for new graduates, so high demand for luxury one bedroom units from a market that has little savings but good income
- crazy real estate market with a healthy appreciation

My cash flow is 0.5% ($1400 per month on a $240k property). We put down a $70k downpayment and have put in the max prepayment for the past three years. The property is currently worth $350k (after 5 years). The rent covers mortgage and HOA fees. Since we bought a brand new unit, we haven't had any repairs in the past five years. The HOA covers all the other major repairs.

The way I calculate ROI is (Rent - HOA fee - taxes)*12/$151000, since that is the amount I personally invested into the unit. That gives me a ROI of 7.8%. Not too shabby since I'm in Canada and we typically have lower market returns than the states. And that doesn't count the profit I would receive if I sold. I don't factor in vacancy because units in the building have rented out in less than one day at asking or over.

So in my case, if I waited for a unit that follows the 1% rule, I'd be waiting forever. I would say, figure out your target market, and look for a location and finishes that would appeal to that market. Also, I think in HCOL areas, it makes sense to use leverage, esp if interest rates are low.

It makes no sense to run numbers without rental increases and no appreciation. That is just not realistic in HCOL markets. Realistically, rents have increased by a certain percentage in my city, and appreciation has been around 5% per year averaged over the last 20 years or so. Appreciation has been 10% per year for units in our building over the past three years, so let's not use that cray-cray number.

Investing in HCOL markets is not about getting lucky. It's about running numbers and understanding your market . It's just that rules of thumb are different because the environment is different.

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #11 on: May 04, 2017, 04:30:24 PM »
It makes no sense to run numbers without rental increases and no appreciation. That is just not realistic in HCOL markets. Realistically, rents have increased by a certain percentage in my city, and appreciation has been around 5% per year averaged over the last 20 years or so. Appreciation has been 10% per year for units in our building over the past three years, so let's not use that cray-cray number.

Erm, HCOL areas crash and burn (or stagnate) too. 40% of the largest metro areas in the US as of 40 years ago *lost population* since then! Think about that for a minute... they might not be making more land, but if people are leaving, that's not much consolation.

Places that seem hot and hip can have all kinds of bad things happen (or just be supplanted by places even hipper and hotter). Furthermore, you can just run the numbers on what indefinite 5-10% appreciation would mean for affordability if wages don't rise at the same page. Exponents are crazy.

Don't get me wrong - I'm rich because of the crazy appreciation of the last decade. I love it. But I recognize how lucky I am, and I'd never tell someone to buy a investment RE hoping for appreciation unless they have a *very* good understanding of their local market.

-W

Freedomin5

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Re: Those who call the 1% rule garbage?
« Reply #12 on: May 05, 2017, 07:41:11 AM »
Agree. Sounds like the takeaway is, if you know your local market, RE can be a good investment even if they don't fit the 1% rule.

clarkfan1979

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Re: Those who call the 1% rule garbage?
« Reply #13 on: May 05, 2017, 07:45:57 AM »
Clark, like many people (including me) you were in the right place at the right time.

Run your numbers with no rental increases in 10 years and no appreciation over inflation, and a broken water heater that caused $10k in damages. Then compare to what you would have made in VTSAX or whatever.

There is nothing wrong with getting lucky. But getting lucky is not a plan.

-W

I don't really think it's luck. I think you do your homework and look at the entire picture. If you focus too much on the 1% rule, I think you are putting blinders on, when it's not necessary.

After grad school, I choose a job in Florida because of the housing market crash. The job had the lowest starting salary out of any of my options. However, I go where I see value. I was bummed that the housing market appreciated so quickly. I was hoping to buy more than one house when I was in Florida, but it didn't happen.

One of my friends from grad school got a job at a University in the Midwest with about 14,000 students. Based on many factors, the table is set for growth. After he is there for one year we are going to start buying property. Many properties within the town meet the 1% rule. However, when you get really close to campus, many of the properties fall short of the 1% rule. More than likely we will buy property that is really close to campus and falls short of the 1% rule.

I think there is a lot more that goes into it than just getting lucky.

Another Reader

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Re: Those who call the 1% rule garbage?
« Reply #14 on: May 05, 2017, 08:27:03 AM »
Anyone here remember HonoBob, who got banned here and at a number of other forums for belittling people that believed in the one percent rule? 

If you are very knowledgeable, you can make a lot of money in HCOL markets and not meet the one percent rule.  The trouble with that is that you must buy when the market is depressed (hint: not now), be willing to accept minimal positive or even negative cash flow for an extended period of time, and get in not too long before the market starts rising.  You have to be experienced enough to recognize the difference between a market that is temporarily depressed and one that is not coming back, like Detroit.  You also have to have cash, so you can get in front of all the other people that see the opportunity.

These are strictly appreciation plays and unless you have the income and assets to survive a protracted downturn, this game is not for you.  If you are dependent on employment income to pay the ongoing costs of the investment property, remember, downturns are when you will lose your job.  Someone else will be picking up the property even cheaper when you fold because you can't keep up.

What I hear in this thread is a lot of people rationalizing buying investment property at a time when it does not make sense.  While I would rather not see people do something stupid, I will be happy to buy your properties at a steep discount in the next distressed market.  Think about all the sharks swimming around you, waiting to smell blood, before you write any checks.




waltworks

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Re: Those who call the 1% rule garbage?
« Reply #15 on: May 05, 2017, 09:56:01 AM »
Yeah, AR and I have been through a couple of cycles. Guess how many investment properties I own right now?

Zilch.

Look, the whole point of the 1% rule is to make sure that for a buy-hold cashflow investor, you're going to not bother looking at properties that won't at least come close to matching stock market returns. It's just a weeding out tool to save you time evaluating properties. If you don't care about cash flow or long term buy/hold, then you don't need to worry about the 1% rule.

-W
« Last Edit: May 05, 2017, 10:09:08 AM by waltworks »

Another Reader

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Re: Those who call the 1% rule garbage?
« Reply #16 on: May 05, 2017, 01:03:58 PM »
I still own a lot because I don't want to pay the capital gains tax or selling expenses and I can't find better income sources to replace the properties. Rents have been going up nicely as well.  I might lose out on total return, but I prefer the steady income and stability of the portfolio I have now.  I did sell a few of the less productive properties in what Sword Guy calls "landlord harvest season" and used up some old, stored depreciation to offset the recapture and capital gains.  Don't want to forget about the unused "losses."  Pruned the portfolio, paid off some mortgages, and now starting to fill the cash war chest for the next downturn.

Lan Mandragoran

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Re: Those who call the 1% rule garbage?
« Reply #17 on: May 05, 2017, 01:57:20 PM »
I personally think where the money in real estate is is in the mortgage pay-down that's experienced.

With the 1% duplex we own, we cashflow 0-100$ (because we had to move it to a 15 year, as its a private loan and they requested we do that). It's not a problem though because were getting something like 10k per year in equity. If you can repeat that with 10 homes or something, even if a less than 1% property and only pulls 5-6k of equity a month your looking at 50k-60 a year in equity. That type of equity becomes significant pretty quickly, and you can start to sell or refinance according to your plans.

That's why my goal is to accumulate as many properties as I can that will simply pay for their operating costs and hopefully enough cashflow to pay for management when we start to have 5+ properties.


The current rental we are working on is a less good deal. 155k with about a 1.3k rental so like a .85 or something. Regardless it will make us about 5-6k per year in paydown while we put 30k into it.

Am I missing something? Because Tax benefits + appreciation + the 5-6k paydown should absolutely crush 30k of stock investments.  Maybe its just that it can be alot more work than indexing or something.
« Last Edit: May 05, 2017, 02:13:54 PM by Lan Mandragoran »

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #18 on: May 05, 2017, 02:54:43 PM »
I personally think where the money in real estate is is in the mortgage pay-down that's experienced.

With the 1% duplex we own, we cashflow 0-100$ (because we had to move it to a 15 year, as its a private loan and they requested we do that). It's not a problem though because were getting something like 10k per year in equity. If you can repeat that with 10 homes or something, even if a less than 1% property and only pulls 5-6k of equity a month your looking at 50k-60 a year in equity. That type of equity becomes significant pretty quickly, and you can start to sell or refinance according to your plans.

That's why my goal is to accumulate as many properties as I can that will simply pay for their operating costs and hopefully enough cashflow to pay for management when we start to have 5+ properties.


The current rental we are working on is a less good deal. 155k with about a 1.3k rental so like a .85 or something. Regardless it will make us about 5-6k per year in paydown while we put 30k into it.

Am I missing something? Because Tax benefits + appreciation + the 5-6k paydown should absolutely crush 30k of stock investments.  Maybe its just that it can be alot more work than indexing or something.

Would the appropriate question be: what are the risks of holding a 30k mortgage on an investment property vs 30k invested in index funds? The assumption is low vacancy rates/rents that produce cashflow + appreciation right? So if for whatever reason the vacancy rates go up/rents aren't enough to produce positive cashflow, and/or depreciation, wouldn't the opposite be true in terms of "crushing" stock investments? Of course, the stock investments might drop if there's depreciation in real estate (per a market crash, etc)... it seems like stating the obvious here but this seems like an example of "greater risk = greater potential reward" but also greater potential loss, yea? Or, is it more like appreciation should be viewed as "icing on the cake" where cash-flowing rental income is the main goal which should nearly match or exceed stock investments? Then comes the question of, like you were alluding to, how many hours or work you're going to put into your real estate investments.
« Last Edit: May 05, 2017, 03:10:11 PM by jeromedawg »

Lan Mandragoran

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Re: Those who call the 1% rule garbage?
« Reply #19 on: May 05, 2017, 03:17:53 PM »
Yeah that's accurate. Just seems the numbers are rather tilted towards real estate to me.

And it is obviously a lot more work. But if that means I can retire in ~ half the time... idc

To me it seems the real risk of real estate is accidental ignorance/incompetence, and screwing up a complicated thing because it takes experience to produce a high degree of competence.


jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #20 on: May 05, 2017, 03:55:43 PM »
Yeah that's accurate. Just seems the numbers are rather tilted towards real estate to me.

And it is obviously a lot more work. But if that means I can retire in ~ half the time... idc

To me it seems the real risk of real estate is accidental ignorance/incompetence, and screwing up a complicated thing because it takes experience to produce a high degree of competence.

Yea that's my understanding - even compared to a 9-5 job, REI can be 'easier' but it's definitely not as passive.

The second part is what scares me most about being a newbie getting into REI - I'm trying to research as much as I can and learn from others (who have made mistakes and learned from them, etc) so as to avoid doing the same thing. But even then it's like a fire hydrant of information of which I'm bound to miss something... just hopefully not something critical.

Lan Mandragoran

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Re: Those who call the 1% rule garbage?
« Reply #21 on: May 05, 2017, 03:58:36 PM »
There are really not 1% rule rentals in CA right now, AFAIK. Maybe if you're doing direct marketing and willing to take advantage of someone senile without any family to advise them or something, but any sort of legit route - no way.

That said, you can find 1% properties at the low end/C- neighborhood in, say, NJ that would look like:
Purchase price $75k
Gross rent $750/mo
Property taxes $3000/year (yes, that high)
Usual assumptions for 10% management, 10% vacancy, CapEx - call it $300-400/mo

If you paid cash for that property, your $75k investment is only generating $100-200/mo in profits, but with all sorts of potential for problems that would wipe out years of profits at once (major plumbing problem renders the place uninhabitable for a while, tenant sues, tenant damages property, etc). You're getting literally the same amount you could make just on dividends in an S&P500 index fund, but with many times the risk (and many times the headaches/stress).

On the other hand, you could find (here in UT, as of 5-7 years ago):
-Purchase price $150k
-Gross rents $1500/mo
-Property taxes $1500/year
-Management/Vacancy/Capex ~$500/mo (assume a similar structure so Capex is about identical)

Now you're profiting $800-900 per month on your $150k investment, so you're in spitting distance of S&P historical returns, which is probably the bare minimum you should accept.

So the 1% rule isn't set in stone, but my mythical UT property is a pretty good setup (low taxes, higher end neighborhood, etc) and it *still just barely matches the return from stocks*.

Note that I'm assuming nothing about appreciation (other than it'll match inflation) because historically this is what you expect. Over the last decade appreciation (from a very low trough) has been very high all over. That won't last, for reasons that should be obvious (eventually nobody can afford a house unless wages rise a lot). Appreciation is also a bitch because you pay a lot to get into a property up front, and then you also pay a bunch (fees, commissions, capital gains, etc) to get back out if you want to sell. Just to break even selling a place (that you don't live in to avoid capital gains) you probably need 15% appreciation!

That's why people use the 1% rule to weed out properties. It's a good rule of thumb to make sure you're not investing in something that is both riskier and has lower returns than a simple index fund.

-W


Well my problem with your argument here would be that, real estate makes little sense most of the time if your not taking advantage of the fact that you can leverage 4 or 5 dollars to one. If its 150k in stocks or a 150k house... yeah take the stocks. But in reality it should be 150k stocks vs a 600-800k multifamily building.


Yeah Jerome, I'm kind of in the same boat. It's an insane amount information. Most helpful thing I've found has been the biggerpockets podcast. I've pretty obsessively been listening to them for the last few months and they are incredibly helpful for familiarizing yourself with what you should look for and avoid.

"Or, is it more like appreciation should be viewed as "icing on the cake" where cash-flowing rental income is the main goal which should nearly match or exceed stock investments?"

Everyone has their own strategy but, personally I prioritize
 #1 Easily rentable home that covers the costs of owning it and hopefully management
      >This gives me the mortgage paydown that seems oft overlooked and in very good ratios.
#2 Cashflow/Tax Advantages
     > Cashflow = FIRE... yes plz :P.
#3 Appreciation
    > Meh, I dont want to sell until the house is fully paid off anyway(at which point stocks seem to win from what research I've done/read). So this is a bonus.
« Last Edit: May 05, 2017, 04:10:08 PM by Lan Mandragoran »

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Re: Those who call the 1% rule garbage?
« Reply #22 on: May 05, 2017, 04:45:31 PM »
With free and clear cap rates in the two to four percent range in the desirable markets, your leverage is going to be negative, not positive.  Your cash flow is going to be minimal, even in a decent rental market. 

Bad tenant, extended eviction with no rent and huge repair costs, and you are going to be out of pocket a lot of cash to get that property producing income again. Can you handle $20k to fix that? Economic downturn, vacancy goes to 15 percent and rents drop 20 percent?  You are going to be feeding that alligator.  Lose your job, and you will let that alligator go.

Real estate is cyclical.  We have come a long way since 2009 in most markets.  Not much more to squeeze out of this cycle.

Lan Mandragoran

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Re: Those who call the 1% rule garbage?
« Reply #23 on: May 05, 2017, 05:35:24 PM »
That seems a bit negative to me. Not sure what you mean by it being negative leverage. Leverage is by its very nature negative :\.

I consider myself to have just done a bad deal and its a 10% cap rate (midwest... but not in bad areas at all).

 " Your cash flow is going to be minimal, even in a decent rental market. "

Thats my point though. EVEN if we got $0 cashflow we are >gaining< $4-500equity a month while we put a total of 30k into it. Thats a return of 5-6k (16.6%) in what I consider a very pessimistic prediction(no cash flow, no appreciation, ignoring tax benefits). I understand its not cashflow... but money is money is money as I heard the other day.

"Bad tenant, extended eviction with no rent and huge repair costs, and you are going to be out of pocket a lot of cash to get that property producing income again. Can you handle $20k to fix that? Economic downturn, vacancy goes to 15 percent and rents drop 20 percent?  You are going to be feeding that alligator.  Lose your job, and you will let that alligator go."

Yeah, its certainly something to think about.

#1 you need a bigger emergency fund than other people

#2 You take into consideration how much your job's cashflow can cover before you buy more properties (or at least what a realistic worst case scenario would be).

#3 Yeah if I lose my job (which for me at least is very stable), tenants burn my house down, 2007 happens, and a tornado blows away my dog ill be screwed ;P. Could happen, but informed decisions based on risk/reward is my goal.  Fortune favors the bold and all that.


"Real estate is cyclical.  We have come a long way since 2009 in most markets.  Not much more to squeeze out of this cycle"

I agree, but I'd say the same thing about the market. Either way, it smells of timing which as this forum knows doesnt bear out to well.

TBH I want to be wrong, because just passively indexing sounds very pleasant :).


« Last Edit: May 05, 2017, 05:39:23 PM by Lan Mandragoran »

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Re: Those who call the 1% rule garbage?
« Reply #24 on: May 05, 2017, 05:50:52 PM »
Do you understand leverage?  Do you understand the difference between positive and negative leverage?

Have you educated yourself about the mathematics of investment properties?  Have you read and understood Gallinelli's book that Sword Guy recommends or have had similar exposure to the math? 

Why not post all the numbers on your 10 percent cap rate property in the midwest?  That way, some of the experienced investors here can analyze them and see if they agree with your conclusion.


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Re: Those who call the 1% rule garbage?
« Reply #25 on: May 05, 2017, 06:35:05 PM »
I've been shouted down a few times here before with respect to 1% etc.

Our market doesn't work the same way... you cant generate significant cash flow here... it's all about appreciation.

Different conditions require different strategies. Just look for demand, pooulation growth, gentrification and good schools.

And don't go too mad at auctions...

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Re: Those who call the 1% rule garbage?
« Reply #26 on: May 05, 2017, 06:50:19 PM »
The real estate market and the equities market are completely different.  The real estate market is cyclical and somewhat predictable.  Buying low and selling high is not that difficult to do in real estate.  Only fools don't practice market timing in real estate investing. 

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Re: Those who call the 1% rule garbage?
« Reply #27 on: May 05, 2017, 07:07:16 PM »
If by "no cash flow" you mean "no cash flow accounting for vacancy, shitty tenants/disasters, routine maintenance, and CapEX (you'll need a roof/furnace/driveway someday) then I'm with you - but you probably have something at least approaching a 1% rule property.

If you mean "each month if things go well I don't spend any money!" then you are going to lose your shirt at some point.

-W
« Last Edit: May 05, 2017, 07:29:53 PM by waltworks »

Lan Mandragoran

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Re: Those who call the 1% rule garbage?
« Reply #28 on: May 05, 2017, 08:10:26 PM »
Do you understand leverage?  Do you understand the difference between positive and negative leverage?

Have you educated yourself about the mathematics of investment properties?  Have you read and understood Gallinelli's book that Sword Guy recommends or have had similar exposure to the math? 

Why not post all the numbers on your 10 percent cap rate property in the midwest?  That way, some of the experienced investors here can analyze them and see if they agree with your conclusion.

Alright...  that was rather condescending. I'll just not post here and you can have your unchallenged assumptions verified.

And lol... 10% cap rate is considered the beginning of a ok investment in anything I research.
(Coach Carson comes to mind saying he would never buy another home at 8.9 %.)

If I'm doing things wrong I'm glad to hear advice, I just want to do what's right. 1% rule in the Midwest is difficult but you act like it's a mythical unicorn that's not real.
 Our duplex = 140k with 1550 rent (100 under market rent because we were doing someone a favor)

Yeah I am aware you have to prep for bad stuff to happen. I assume 1.5% maintenance a year =].
On an iPhone sry for poor grammar


« Last Edit: May 05, 2017, 08:17:03 PM by Lan Mandragoran »

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #29 on: May 05, 2017, 08:40:45 PM »
Um, ok. You have a 1% (actually a little better) rule property. WTF are you arguing with us about?

-W

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Re: Those who call the 1% rule garbage?
« Reply #30 on: May 05, 2017, 09:42:35 PM »
"Alright...  that was rather condescending. I'll just not post here and you can have your unchallenged assumptions verified."

Some of your statements indicated to me you might not fully understand the math.

I place little weight on what Coach Carson says.  He's selling a product, and it's not real estate.

One percent should be doable in lots of midwest markets, even in good neighborhoods.  It's not doable in any area of California.  Phoenix is averaging 0.6 percent per month.  I'm a seller, not a buyer at that percentage.  A 10 percent cap rate (free and clear) would imply a much higher percentage per month.

As Walt says, you have a one percent property.  Would be interesting to see the income and expense history for your ownership.  I think it would be helpful for those folks that are thinking about investing to see some real numbers.

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Re: Those who call the 1% rule garbage?
« Reply #31 on: May 05, 2017, 11:32:00 PM »
The real estate market and the equities market are completely different.  The real estate market is cyclical and somewhat predictable.  Buying low and selling high is not that difficult to do in real estate.  Only fools don't practice market timing in real estate investing.

"Buying low and selling high is not that difficult to do in real estate. Only fools don't practice market timing in real estate investing." What separates this perspective from the "speculation" that a lot of real estate investors warn against?

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Re: Those who call the 1% rule garbage?
« Reply #32 on: May 06, 2017, 06:20:33 AM »

"Buying low and selling high is not that difficult to do in real estate. Only fools don't practice market timing in real estate investing." What separates this perspective from the "speculation" that a lot of real estate investors warn against?

I don't think you understand.  Lets take a specific Phoenix area submarket for example.  At the peak of the market in early 2006, 1,250-1,300 sf houses were selling for $180-$190k and were renting for $700, if you could find a tenant.  Everyone that could fog a mirror could get a mortgage and a lot of those folks did.  A lot of dumb money bought investments, based on continued appreciation.  By 2009, those houses sold for $65k to $75k, and rented for $750 to $795, and tenants were lined up to get them because so many had lost the houses they bought in 2005-2006.  I bought a number of those houses for $65-$74k for cash, because I had the liquidity to do so.  Today those houses sell for $170k to $185k and rent for $995-$1,075.

In 2006, the numbers made no sense.  By 2009, they made a lot of sense.  The dumb money was fearful because the world was likely coming to an end, and stayed out.  The smart money saw opportunity and started buying.  Today, the numbers no longer make sense.  Waltworks would sell these properties and deploy the capital elsewhere.  As a long term, Warren Buffett-style, buy and hold investor, I deposit the rent checks, sell opportunistically to prune the portfolio, store up cash, and pay off mortgaged properties.

People that compare the real estate market to the stock market are either not very smart or are using that market and its' behavior to sell you real estate that doesn't make sense.  Stop reading the con artists that frequent Bigger Pockets and the phony REI associations and look for some real investors to learn from.

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #33 on: May 06, 2017, 09:24:16 AM »
Exactly - I saw the crash as a once-in-a-lifetime buying opportunity. Then the properties became worth enough that I wouldn't in a million years buy them at their rental rates, and I don't see a lot of space for growth in rents in the medium term, so I dumped 'em and put the money in index funds (and built a basement apartment in my house that easily meets the 2% rule and I can manage super easily).

AR's approach is fine too. What's NOT fine is buying a property only for appreciation unless you're fully cognizant of both the conditions of the local market, the risks you're taking, and the historical reality that unlike stocks, RE basically doesn't appreciate (or at least doesn't appreciate much) over the long term. Gov't support of RE leverage gives you an advantage though.

Unlike the stock market, the dice in RE appreciation plays are loaded against you. That doesn't mean it's impossible to do (RE is much less competitive than stocks and you can use brains/work to get good deals) but it does mean you are going to have to really have your act together.

Let me say this one more time: The fact that lots of people made money on RE appreciation in the last decade DOES NOT MEAN that will continue. In fact, it's probably a good indication that it's almost *impossible* to do now.

-W

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #34 on: May 06, 2017, 11:17:24 AM »
So are you guys generally saying that where the 1% rule isn't being met right now or is grossly far from it, wait for a RE market downturn to where properties *would* come closer to 1% and look to buy then? e.g. Here in SoCal a $500k-600k 'market value' property will likely rent for $2k-2.5k, so wait for a downturn (or look for deals) where it's selling at $200-250k? I just checked some rentals vs price/purchase history and quite a few properties in a nearby city were scooped up in 2011 for $250-275k and are renting for around $2.2k-2.5 - of course, I'm not sure how much money went into repairs/renovations either and I'm sure there's more to than than just the 1% rule that would determine whether or not those were good buys.
I guess the other problem with this is that, at least here in SoCal, there be a high likelihood of multiple bidders bidding the price back up unless everyone is scared.

In either case, it sounds like the 1% rule is a valid guideline/tool but of course do your due diligence in analyzing everything else (cap rates, cash on cash return, area demographic/growth, comps, etc). And if you're buying for appreciation, make sure you know what you're getting into and that you know what a downturn actually looks like before you buy (make a calculated risk) but likely that train has already left the station.
« Last Edit: May 06, 2017, 11:29:02 AM by jeromedawg »

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Re: Those who call the 1% rule garbage?
« Reply #35 on: May 06, 2017, 11:27:24 AM »
Go back and read my post #14.  You can make money without meeting the 1 percent rule in a HCOL area, but it takes skill and a lot of cash.  My neighbors bought their house for $795k +/- in 2011.  The house today, with a lot of modern, HGTV type DIY renovations, is probably worth 1.35 - 1.4MM.  It would rent for maybe $4,500. 

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #36 on: May 06, 2017, 11:30:05 AM »
Go back and read my post #14.  You can make money without meeting the 1 percent rule in a HCOL area, but it takes skill and a lot of cash.  My neighbors bought their house for $795k +/- in 2011.  The house today, with a lot of modern, HGTV type DIY renovations, is probably worth 1.35 - 1.4MM.  It would rent for maybe $4,500.

This goes back to "value add" right? I think those kinds of purchases would make a lot more sense if you plan to live in the place initially while fixing it up to add value (especially if negative cashflow is anticipated), then eventually rent it out after the presumable appreciation occurs. Then maybe refinance and apply the capital towards another RE investment or primary residence to fix up or the S&P500. But it makes sense that you would need a lot of cash to support this kind of investment.
« Last Edit: May 06, 2017, 11:34:55 AM by jeromedawg »

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Re: Those who call the 1% rule garbage?
« Reply #37 on: May 06, 2017, 11:38:15 AM »
Had they not renovated and left the original finishes, it would go for at least $1,250k.  You continue to miss the point.  You can buy in HCOL areas when the proverbial blood is running in the streets and make money without meeting the 1 percent rule.  You bet on appreciation and a return to a seller's market.  There's a significant risk to that bet, but coastal California appreciation has significantly outpaced inflation since WWII.

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #38 on: May 06, 2017, 11:51:24 AM »
Had they not renovated and left the original finishes, it would go for at least $1,250k.  You continue to miss the point.  You can buy in HCOL areas when the proverbial blood is running in the streets and make money without meeting the 1 percent rule.  You bet on appreciation and a return to a seller's market.  There's a significant risk to that bet, but coastal California appreciation has significantly outpaced inflation since WWII.

So SoCal is a higher-stakes game but with greater rewards. Cashflow will eventually come but likely minimally or at a loss initially. It seems a lot of investors who invest out here currently just want to flip properties? And they'll say to wait for the next downturn to look for buy and holds. Are you ultimately saying that because it's CA though, the risk of coming up short due to buying homes based purely on future appreciation *can* be lower given historical appreciation?

That said, if you personally had the opportunity to invest here (maybe you already do), would you be willing to accept the minimal or negative cashflow if it meant greater returns later? I'm assuming that decision would mostly be according to your own risk tolerance?
« Last Edit: May 06, 2017, 12:00:12 PM by jeromedawg »

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Re: Those who call the 1% rule garbage?
« Reply #39 on: May 06, 2017, 12:22:03 PM »
"It seems a lot of investors who invest out here currently just want to flip properties? And they'll say to wait for the next downturn to look for buy and holds."

I'd be a little cautious on the flips, at least here.  The market is starting to slow.  Can't speak for Southern California.  But "they" are right about the buy and holds.

"So SoCal is a higher-stakes game but with greater rewards. Cashflow will eventually come but likely minimally or at a loss initially."

Over the long term, value and rent increases in the more desirable areas of coastal California should be better than most of the rest of the country.  However, your returns can be as good elsewhere if you pay attention and know what you are doing.  Whether you cash flow on a coastal California investment from the beginning will depend on the market at the time you buy.

"That said, if you personally had the opportunity to invest here (maybe you already do), would you be willing to accept the minimal or negative cashflow if it meant greater returns later?"

Well, I probably would have bought the house next door if I had had that much cash in the bank when it came up for sale.  As an investor, sadly only cash would have trumped the owner-occupant sale.  The answer to your question is where I invest at any given time depends on the investment opportunities at that point.  Another Oakland Hills fire with lots selling for $50k a year later?  Count me in.  No cash flow at all, and you pay the property taxes while you wait.

The key to investment to success in my opinion is to know when to put the check book away.  My check book has cobwebs right now.  In your shoes, I would spend time learning the numbers, evaluating mediocre and bad investments for the practice, and finding the right people to talk to while waiting for better opportunities to appear.

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #40 on: May 06, 2017, 01:14:13 PM »
"It seems a lot of investors who invest out here currently just want to flip properties? And they'll say to wait for the next downturn to look for buy and holds."

I'd be a little cautious on the flips, at least here.  The market is starting to slow.  Can't speak for Southern California.  But "they" are right about the buy and holds.

"So SoCal is a higher-stakes game but with greater rewards. Cashflow will eventually come but likely minimally or at a loss initially."

Over the long term, value and rent increases in the more desirable areas of coastal California should be better than most of the rest of the country.  However, your returns can be as good elsewhere if you pay attention and know what you are doing.  Whether you cash flow on a coastal California investment from the beginning will depend on the market at the time you buy.

"That said, if you personally had the opportunity to invest here (maybe you already do), would you be willing to accept the minimal or negative cashflow if it meant greater returns later?"

Well, I probably would have bought the house next door if I had had that much cash in the bank when it came up for sale.  As an investor, sadly only cash would have trumped the owner-occupant sale.  The answer to your question is where I invest at any given time depends on the investment opportunities at that point.  Another Oakland Hills fire with lots selling for $50k a year later?  Count me in.  No cash flow at all, and you pay the property taxes while you wait.

The key to investment to success in my opinion is to know when to put the check book away.  My check book has cobwebs right now.  In your shoes, I would spend time learning the numbers, evaluating mediocre and bad investments for the practice, and finding the right people to talk to while waiting for better opportunities to appear.

Thanks! It's [slowly] making more sense now. A lot of this is about patience and timing, and it seems that's the case even in terms of waiting to buy a potential first property - in other words, just because something *might* be cash flowing for you 1000 miles away doesn't necessarily mean it's good to buy for you... at least do the due diligence before you might consider it. I've definitely taken more interest in watching (and then analyzing some) MLS listings from one of my RE agent friends and just researching different areas around the US that I might be interested in investing in and narrowing that list down. I just don't want to be rushed into making hasty decisions but at the same time I think it's hard trying to discern *when* to jump in as well - it doesn't necessarily help when a bunch of other investors around you tell you "just jump in an do a deal ASAP! that's the only way you'll learn" - while that's true that I'll "learn" I don't know if I want to learn the harder-than-necessary way.

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Re: Those who call the 1% rule garbage?
« Reply #41 on: May 06, 2017, 01:27:51 PM »
People that tell you "just jump in an do a deal ASAP! that's the only way you'll learn" are not the people you want to work with.  A lot of them have something to sell you and therefore an interest in getting you to make the leap.  Anyone that takes that approach in their investing is going to make some bad investments along the way. Again, not the kind of people you want to surround yourself with.

As a beginner, you are better off to stay away from the Bigger Pockets people and the sketchy "straw buyer" shills.  Look for people in your area that are quiet investors - the ones with a few single family homes, maybe a duplex, and an eight unit they picked up at an auction 20 years ago.  Those are the people you can learn the most from.

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #42 on: May 06, 2017, 02:27:44 PM »
Honestly, the way to get your feet wet is duplex, duplex, duplex. You can easily self manage and you can watch things break/wear out/etc in real time. Your own half of the place will experience the same stuff. You'll get practice evaluating tenants and get to know them really well probably. And you're taking much less risk because duplexes are usually cheaper than SFHs and you can live in half of the place yourself.

If you are listening to a coach or paying for a program to teach you this stuff... you should take a big step back. RE investing (especially now) is for detail oriented people who like doing math and have lots of patience. If you have those traits, you probably don't need to pay someone anything. Go to the library (there's a sticky at the top of the forum!) and sit down with Excel and teach yourself what numbers will work and what numbers won't.

There is no quick and easy money in RE unless you get very lucky. A lot of us did in the 2009-2012 timeframe but that time is long over. Anyone telling you their system is going to guarantee you success is selling you snake oil.

-W

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #43 on: May 06, 2017, 05:07:47 PM »
Thanks guys. Yea, I hear duplexes and house hacking are one of the good ways to do it. I've thought about doing that but it's expensive even around here in Orange County. That said, would you recommend duplexes *without* the house hacking part though?

I can get pretty detail oriented about this stuff but I need ramp-up time to get into it. I guess that's what all this research is for now :) My wife is probably the same or even more so - she's really into reconciling YNAB and Mint and will resort to Excel to run numbers for her parents and random other stuff we do (her background is in accounting and was working as an accountant before going SAHM last year). 

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #44 on: May 06, 2017, 06:26:33 PM »
OC? Forget it unless you are doing a house hack (live in one half of a duplex) or you have a LOT of play money and like to take risks.

You are going to want to look outside of town and probably outside of the state.

I think the thing to remember here is that unless you have some solid opportunities and capital you can afford to lose, you are way better off just working your day job (or finding a side gig) and maxing your tax advantaged accounts. If you want some RE exposure, buy REITs. The market is not good for RE investing right now, especially in CA. I know it seems exciting and profitable, but seriously, it's certainly not easy money anytime and especially not now.

-W

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Re: Those who call the 1% rule garbage?
« Reply #45 on: May 06, 2017, 07:30:51 PM »
OC? Forget it unless you are doing a house hack (live in one half of a duplex) or you have a LOT of play money and like to take risks.

You are going to want to look outside of town and probably outside of the state.

I think the thing to remember here is that unless you have some solid opportunities and capital you can afford to lose, you are way better off just working your day job (or finding a side gig) and maxing your tax advantaged accounts. If you want some RE exposure, buy REITs. The market is not good for RE investing right now, especially in CA. I know it seems exciting and profitable, but seriously, it's certainly not easy money anytime and especially not now.

-W

What about syndications?

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #46 on: May 06, 2017, 08:17:20 PM »
Any that are operating right now are mostly looking to fleece investors and/or are taking big risks, IMO. There's no free lunch.

Go REIT if you want some RE exposure.

-W

Another Reader

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Re: Those who call the 1% rule garbage?
« Reply #47 on: May 06, 2017, 08:40:03 PM »
The best properties and deals are not going to syndication.  The leftovers are being fought over by the syndicators and the crowd funding platforms as you move down the food chain.

NoNonsenseLandlord

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Re: Those who call the 1% rule garbage?
« Reply #48 on: May 10, 2017, 07:43:15 AM »
Property values will not outpace wage increases for the extended time.  Anyone who relies on property appreciation to make a purchase is a speculator.  With appreciation you pay a LOT of property taxes and other expenses while you wait for your property to appreciate.

There were MANY failed real estate 'investors' in 2008+.  They are what could have caused the downfall of the housing market, among other things.  Many got locky prior to 2008 as property values going up saved them.

A 1% is a rough estimate.  Much depends on other expenses. 

Lan Mandragoran

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Re: Those who call the 1% rule garbage?
« Reply #49 on: May 10, 2017, 02:40:03 PM »
Um, ok. You have a 1% (actually a little better) rule property. WTF are you arguing with us about?

-W

My point is, the pay down on homes tends to get ignored by investors. And I dont understand why.  Even non or barely cashflowing homes can sometimes seem to be ok options to me when I look at the numbers.

http://www.calculator.net/rental-property-calculator.html?cprice=112000&cdownpayment=20&cinterest=4.5&cloanterm=15&cothercost=14500&ctax=1568&ctaxincrease=3&cinsurance=400&cinsuranceincrease=3&choa=0&choaincrease=3&cmaintenance=1200&cmaintenanceincrease=3&cother=120&cotherincrease=3&crent=1200&crentincrease=3&cvacancy=8&cmanagement=8&cknowsellprice=no&cappreciation=3&csellprice=200000&cholding=15&csellcost=8&printit=0&ctype=&x=71&y=18


Above is a decent home in my area I just ran the numbers on. Even not accounting for cashflow at the end of those 15 years its worth significantly more to sell than the 36900 initially invested would have provided(like 101k if memory serves so, if it appreciates 0 dollars it still comes out ahead). This is >with< a management company and what I believe to be somewhat conservative expenses. Adjust the numbers if you dont think thats accurate.
« Last Edit: May 10, 2017, 02:43:02 PM by Lan Mandragoran »