Makes sense.
The numbers I ran show a much more pessimistic view of a break-even house than I thought. They also showed that it made sense, for example, to add some of my own cash (negative cash flow) for long-term returns. That part makes sense since I don't particularly care about cash flow as long as it's not sinking too much of my money. This, along with my preference to not leverage too much, confirms my desire to focus on a smaller number of paid-off houses than a larger number of leveraged ones, even if the returns are smaller; I'm more than happy to go 100% stock index funds because their ups and downs won't matter until I sell, but I don't want as much leverage as you're comfortable with because I don't want a confluence of crappy events to leave me with a bunch of negative cash flow that I didn't sign up for.
They also showed that, for example, a house at $50k renting for $600/month, especially if I add another $100 of my own, is a very good long-term (~40 year) investment. In other words, 1% is dandy, 1.15% is excellent, much more than I thought before I ran numbers.
I need to fix up my model by assuming compounding interest on the returns (so after the house is paid off and is cash flowing); because anything I invest in funds has compounding interest and dividend reinvestment. I think I will see a big benefit from that.
Out of curiosity - I know you're a big proponent of leverage. Have you done the math to show 40- or 50- or even 60-year returns using your leverage strategy versus one that uses much less? Do you care? (I feel like I've read you saying that you'd likely divest yourself by the time you got to those lengths of time, making the question moot.)
Do you mind to share your spreadsheet in progress?
I see where you are coming from, not wanting to get over-leveraged.
I'm a fan of leverage (for my situation and goals). I like to think I employ it strategically and conservatively. For example, my RE portfolio includes 4 places that I've bought in 2012-2014 that are in the $40K - $45K range and rent from $625 - $700. Point being, there are still places to be had that exceed the 1% rule, well after the housing crisis rebound. These aren't places that were bough 12-15 years ago. They are in the sweet spot you are talking about.
To me the question of how much leverage to employ depends on many factors. One is how fast I want to grow this business/portfolio. Even though I'm FIRE, I'm young enough that my goals are focused on growth. My thinking is.... I'll continue to employ leverage at least until I want to scale back growth. At that point I can put positive cash flow towards paying down mortgages as opposed to more RE. But since there's also a hedge against inflation provided by the cheap mortgages, I doubt that will happen, even when I put the business on cruise control (stop buying new properties and possibly put some under management, or even 1031 exchange into one larger asset or business that's easier to manage).
As a business owner, I worry very much about the worst-case scenario like the confluence of crappy events you describe. But run the numbers on a $40K place that rents for $625 or a $45k place that rents for $700. Consider the event(s) that would have to happen to drive the market rent rate from $625 to $400! and from $700 to $450! And even in that unlikely circumstance, I'd still have investments meeting the 1% rule! Even with $1000 of expenses factored, the rent would have to fall from $625 to $350 (or $700 to $410) before it went ever-so-slightly cash flow negative! I'm not saying it can't happen. But my business is built to withstand drops even worse than that for a prolonged period. I would never take on so much leverage that, as a whole, the business couldn't survive for a couple years in terrible circumstances.
Notice that my worst-case scenarios, as a cash-flow investor, don't have anything to do with the market value of my assets, but only the market value of my rents. If one of my properties loses half it's value on paper, and I have to reduce rent by 10-15% to keep tenants, I just keep moving. Now, if (somehow) I have to reduce rents by 50% but the property has only lost 10-15%, I may consider selling and taking the loss.... if I think that scenario will persist for that property.
Combine that strategy with one that diversifies holdings to include properties in different states, parts of town, numbers of bedrooms, etc and you can reduce the likelihood that ALL properties would suffer at the same time.
Instead of looking for deals that "will always win" I look for deals that "will almost never lose", just because I share your respect for a worst case scenario and believe in preparedness. But I still think it's wise for me to exploit leverage while it's cheap since my current goal is to grow my assets.
