Author Topic: 1 percent or less  (Read 8291 times)

JJ saves

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1 percent or less
« on: November 17, 2016, 12:29:22 PM »
My current home of five years was purchased for 190,000. Taxes, mortgage, insurance, combined equals 1150 monthly. Prices have gone up significantly since then. My home is worth somewhere around 310-330,000 now. If i bought now in the same neighborhood I wouldn't be able to save half my income Id probably rent.

I would like to buy a rental property, however its very hard finding something that meets the 1 percent rule. Can you still make money on a property thats slightly less then 1 percent?

For example- Ruff estimates-  200,000 house
mortgage, taxes, insurance    -1,000 @ 3.87
Rent                                     -1400

Now those are just ruff estimates, however there is still potential to come up 400$ each month. The house dose not meet the one percent rule of 2000 rent. I can buy several over the next few years and triple my cash flow. I can find properties like these in CA, but not ones that actually meet the 1 percent rule.

Would buying a rental like the one I listed above make sense? The neighborhood is good, schools are some of the best in the Palm Springs, CA area.

mskyle

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Re: 1 percent or less
« Reply #1 on: November 18, 2016, 08:27:46 AM »
My current home of five years was purchased for 190,000. Taxes, mortgage, insurance, combined equals 1150 monthly. Prices have gone up significantly since then. My home is worth somewhere around 310-330,000 now. If i bought now in the same neighborhood I wouldn't be able to save half my income Id probably rent.

I would like to buy a rental property, however its very hard finding something that meets the 1 percent rule. Can you still make money on a property thats slightly less then 1 percent?

For example- Ruff estimates-  200,000 house
mortgage, taxes, insurance    -1,000 @ 3.87
Rent                                     -1400

Now those are just ruff estimates, however there is still potential to come up 400$ each month. The house dose not meet the one percent rule of 2000 rent. I can buy several over the next few years and triple my cash flow. I can find properties like these in CA, but not ones that actually meet the 1 percent rule.

Would buying a rental like the one I listed above make sense? The neighborhood is good, schools are some of the best in the Palm Springs, CA area.

You yourself say that you don't think buying a house to live in in your area would be a good deal for you today, and that you would most likely choose to rent. So why would you want to buy a property so that someone else can save money by renting?

The 1% rule isn't hard and fast, so far as I understand, but it's a guideline meant to take into account maintenance, vacancy, etc. One serious problem with the house you're describing could wipe out your cash flow for a year or more. Imagine: a sewer pipe ruptures, you need to pay thousands to get it fixed & have to release your tenants from the lease because there's no toilet - that's goodbye to a year's worth of cash flow, and hopefully you had the reserves on hand to pay for the repairs and to cover the mortgage during the vacancy.

Oh also don't forget you probably won't be able to get the same insurance and mortgage rates on a rental property as you will on a home you occupy. In my city landlords also pay higher property taxes than residents.

Not every place has slam-dunk investment properties available.

JJ saves

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Re: 1 percent or less
« Reply #2 on: November 18, 2016, 09:54:24 AM »
My current home of five years was purchased for 190,000. Taxes, mortgage, insurance, combined equals 1150 monthly. Prices have gone up significantly since then. My home is worth somewhere around 310-330,000 now. If i bought now in the same neighborhood I wouldn't be able to save half my income Id probably rent.

I would like to buy a rental property, however its very hard finding something that meets the 1 percent rule. Can you still make money on a property thats slightly less then 1 percent?

For example- Ruff estimates-  200,000 house
mortgage, taxes, insurance    -1,000 @ 3.87
Rent                                     -1400

Now those are just ruff estimates, however there is still potential to come up 400$ each month. The house dose not meet the one percent rule of 2000 rent. I can buy several over the next few years and triple my cash flow. I can find properties like these in CA, but not ones that actually meet the 1 percent rule.

Would buying a rental like the one I listed above make sense? The neighborhood is good, schools are some of the best in the Palm Springs, CA area.

You yourself say that you don't think buying a house to live in in your area would be a good deal for you today, and that you would most likely choose to rent. So why would you want to buy a property so that someone else can save money by renting?

The 1% rule isn't hard and fast, so far as I understand, but it's a guideline meant to take into account maintenance, vacancy, etc. One serious problem with the house you're describing could wipe out your cash flow for a year or more. Imagine: a sewer pipe ruptures, you need to pay thousands to get it fixed & have to release your tenants from the lease because there's no toilet - that's goodbye to a year's worth of cash flow, and hopefully you had the reserves on hand to pay for the repairs and to cover the mortgage during the vacancy.

Oh also don't forget you probably won't be able to get the same insurance and mortgage rates on a rental property as you will on a home you occupy. In my city landlords also pay higher property taxes than residents.

Not every place has slam-dunk investment properties available.

Thanks for the info. I see now how easily my cash gains could be lost with vacancy or big fix . CA is defiantly not a slam dunk from what I am seeing. I like the idea of owning rentals due to a steady monthly cash flow. Combined with my index funds would be good. However the numbers have to be much better. 1 percent properties gotta be out there, Ill find them!

fishnfool

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Re: 1 percent or less
« Reply #3 on: November 18, 2016, 12:01:28 PM »
You can make money buying a investment property that doesn't meet the 1% rule if.....

You're in a area with a very tight rental market, limited SFH, good local job market, college or university nearby, desirable weather etc etc.

While $1400 rent with $1000 a month expenses doesn't leave you a lot of extra funds for repairs and vacancies, it might still be a good investment if the area meets most of the above criteria and you expect some more appreciation down the road.


JJ saves

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Re: 1 percent or less
« Reply #4 on: November 18, 2016, 03:17:07 PM »
You can make money buying a investment property that doesn't meet the 1% rule if.....

You're in a area with a very tight rental market, limited SFH, good local job market, college or university nearby, desirable weather etc etc.

While $1400 rent with $1000 a month expenses doesn't leave you a lot of extra funds for repairs and vacancies, it might still be a good investment if the area meets most of the above criteria and you expect some more appreciation down the road.

What would be a comfortable number to be profiting $500, $600? I do think $500 is doable.

fishnfool

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Re: 1 percent or less
« Reply #5 on: November 18, 2016, 05:44:22 PM »
You can make money buying a investment property that doesn't meet the 1% rule if.....

You're in a area with a very tight rental market, limited SFH, good local job market, college or university nearby, desirable weather etc etc.

While $1400 rent with $1000 a month expenses doesn't leave you a lot of extra funds for repairs and vacancies, it might still be a good investment if the area meets most of the above criteria and you expect some more appreciation down the road.

What would be a comfortable number to be profiting $500, $600? I do think $500 is doable.
It depends.......

Are you putting cash down or pulling out equity of your primary home?

Because if its the latter, you need to consider the interest costs on a HELOC and I would be very careful doing a HELOC with the expected rate increases we may soon see. That could eat up all of the small profit the deal might bring!

But yeah, $500 or more profit after all in expenses would be something I'd consider for the right property. A solid house in good shape not needing any major work etc. in the right housing market. 

Also have a emergency rental fund on hand for when the unexpected happens. ;)


Dicey

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Re: 1 percent or less
« Reply #6 on: November 20, 2016, 12:16:44 PM »
Though I'm pro-real estate, own rental property (in Palm Desert, CA, right next door) and achieved FIRE,  I always wonder what would have happened if I had just utilized passive investments. Equities don't have sewer lines that break or tenants who fail to pay rent.

What you are failing to calculate is the work that is involved in being a landlord. Methinks you have not hit on a winning formula.

clarkfan1979

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Re: 1 percent or less
« Reply #7 on: November 20, 2016, 02:07:21 PM »
You can make money buying a investment property that doesn't meet the 1% rule if.....

You're in a area with a very tight rental market, limited SFH, good local job market, college or university nearby, desirable weather etc etc.

While $1400 rent with $1000 a month expenses doesn't leave you a lot of extra funds for repairs and vacancies, it might still be a good investment if the area meets most of the above criteria and you expect some more appreciation down the road.

These are all very good points. I really disagree with comments that solely base a decision by the 1% rule only.

I have two rentals near Universities. My average turnover is 2 years, but my vacancy has been 0% over the last 9 years.

One rental met the 1% rule right away and was a slam dunk. The other rental did not meet the 1% right away, but was a good long term investment.

Rental #1: Purchased for 182K and 10K of initial rehab cost with most of the work by myself. This was in May 2007 and pretty much the bottom of the market for the area. There were maybe a couple houses that sold for 175k, but that was pretty much as cheap as they got. The current rent at the time was $1300/month. Mortgage, taxes and insurance is $950.

The current rent today is $2000/month and my lease next year is going to be $2200/month. Zillow current says it's worth 335K. However, I think 320K is more appropriate. Should I have not purchased this property because it didn't meet the 1% rule? Should I have invested out of state to get a better deal? I think I did just fine staying in my local area at the time.

JJ saves

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Re: 1 percent or less
« Reply #8 on: November 28, 2016, 09:36:54 AM »
You can make money buying a investment property that doesn't meet the 1% rule if.....

You're in a area with a very tight rental market, limited SFH, good local job market, college or university nearby, desirable weather etc etc.

While $1400 rent with $1000 a month expenses doesn't leave you a lot of extra funds for repairs and vacancies, it might still be a good investment if the area meets most of the above criteria and you expect some more appreciation down the road.

These are all very good points. I really disagree with comments that solely base a decision by the 1% rule only.

I have two rentals near Universities. My average turnover is 2 years, but my vacancy has been 0% over the last 9 years.

One rental met the 1% rule right away and was a slam dunk. The other rental did not meet the 1% right away, but was a good long term investment.

Rental #1: Purchased for 182K and 10K of initial rehab cost with most of the work by myself. This was in May 2007 and pretty much the bottom of the market for the area. There were maybe a couple houses that sold for 175k, but that was pretty much as cheap as they got. The current rent at the time was $1300/month. Mortgage, taxes and insurance is $950.

The current rent today is $2000/month and my lease next year is going to be $2200/month. Zillow current says it's worth 335K. However, I think 320K is more appropriate. Should I have not purchased this property because it didn't meet the 1% rule? Should I have invested out of state to get a better deal? I think I did just fine staying in my local area at the time.

Thanks for the info. Your rental paid off nicely for you. Id like to get a rental with the same possibilities. I think if the rental is in a desirable area with good schools, the potential for growth is there.

waltworks

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Re: 1 percent or less
« Reply #9 on: November 28, 2016, 08:26:56 PM »
Bluntly, if you bought real estate from 2008-2012 (plus or minus a bit depending on where you are) in the US, you killed it. But it wasn't because you were smart to ignore the 1% rule, it was because real estate was *literally* half price in many places.

Don't learn the wrong lesson from that (I made out like a bandit too). You're not a genius and the rules still apply to you, and rents/prices aren't going up another 50-100% in the next decade.

This is a crap time to buy rentals unless you are buying in some parts of the rust belt/midwest or you have some specific awesome deal you find. If it's on the MLS in any normal market, it's probably a crap rental.

-W

JJ saves

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Re: 1 percent or less
« Reply #10 on: November 29, 2016, 09:24:25 AM »
Bluntly, if you bought real estate from 2008-2012 (plus or minus a bit depending on where you are) in the US, you killed it. But it wasn't because you were smart to ignore the 1% rule, it was because real estate was *literally* half price in many places.

Don't learn the wrong lesson from that (I made out like a bandit too). You're not a genius and the rules still apply to you, and rents/prices aren't going up another 50-100% in the next decade.

This is a crap time to buy rentals unless you are buying in some parts of the rust belt/midwest or you have some specific awesome deal you find. If it's on the MLS in any normal market, it's probably a crap rental.

-W

I agree, it is a sellers market. Wish I would of bought a second property a few years back. There has to be some deals to be had, even in CA. At least Im hoping for that. Following the rules will be a hell of a challenge but I will. The good thing however is Im not starving for a property. If the numbers don't work Ill move on to the next. Eventually, maybe the diamond in the ruff will show itself? In the mean time normal investing continues. 

Johnny Aloha

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Re: 1 percent or less
« Reply #11 on: November 29, 2016, 10:16:14 AM »
Can you still make money on a property thats slightly less then 1 percent?

There once was a forum member who talked about this quit a bit -- that the 1 percent rule is no guarantee of profitability.  A few years ago I didn't understand what that meant.

Fast forward a few years.  I own a couple properties in a HCOL area, and a multi-family in a LCOL area.  The properties in the HCOL area did not, and still do not, meet the 1% rule.  The property in the LCOL area exceed the 1% rule at purchase (2.46% to be exact).

Guess what has been less work, less risk, and much more profit?

My net worth would be significantly less if I would have skipped buying a property that didn't meet the 1% rule.

waltworks

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Re: 1 percent or less
« Reply #12 on: November 29, 2016, 11:31:43 AM »
Yeah, everyone who bought stuff 5 years ago thinks they're a genius.

Sigh.

-W

JJ saves

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Re: 1 percent or less
« Reply #13 on: November 30, 2016, 09:27:35 AM »
You can make money buying a investment property that doesn't meet the 1% rule if.....

You're in a area with a very tight rental market, limited SFH, good local job market, college or university nearby, desirable weather etc etc.

While $1400 rent with $1000 a month expenses doesn't leave you a lot of extra funds for repairs and vacancies, it might still be a good investment if the area meets most of the above criteria and you expect some more appreciation down the road.

What would be a comfortable number to be profiting $500, $600? I do think $500 is doable.
It depends.......

Are you putting cash down or pulling out equity of your primary home?

Because if its the latter, you need to consider the interest costs on a HELOC and I would be very careful doing a HELOC with the expected rate increases we may soon see. That could eat up all of the small profit the deal might bring!

But yeah, $500 or more profit after all in expenses would be something I'd consider for the right property. A solid house in good shape not needing any major work etc. in the right housing market. 

Also have a emergency rental fund on hand for when the unexpected happens. ;)

This is another problem Im trying to solve. I have the cash for the down payment, however all my money is invested in Index funds.

Would it be smarter to pull the money out of my index fund or get the HELCO?

Given that rates will rise, what would be a good interest rate for a rental...4%  5%?
« Last Edit: November 30, 2016, 09:29:57 AM by JJ saves »

JJ saves

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Re: 1 percent or less
« Reply #14 on: November 30, 2016, 09:35:49 AM »
Can you still make money on a property thats slightly less then 1 percent?

There once was a forum member who talked about this quit a bit -- that the 1 percent rule is no guarantee of profitability.  A few years ago I didn't understand what that meant.

Fast forward a few years.  I own a couple properties in a HCOL area, and a multi-family in a LCOL area.  The properties in the HCOL area did not, and still do not, meet the 1% rule.  The property in the LCOL area exceed the 1% rule at purchase (2.46% to be exact).

Guess what has been less work, less risk, and much more profit?

My net worth would be significantly less if I would have skipped buying a property that didn't meet the 1% rule.

Thank you for sharing this!!

Are you still buying properties in HCOL areas?

I would assume a lot less turnover in a HCOL area. Id also think easier to rent because most can not afford to buy a home in a HCOL area.

JJ saves

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Re: 1 percent or less
« Reply #15 on: November 30, 2016, 09:48:38 AM »
Though I'm pro-real estate, own rental property (in Palm Desert, CA, right next door) and achieved FIRE,  I always wonder what would have happened if I had just utilized passive investments. Equities don't have sewer lines that break or tenants who fail to pay rent.

What you are failing to calculate is the work that is involved in being a landlord. Methinks you have not hit on a winning formula.

Im also looking to buy in Palm Desert and La Quinta. I understand there will be work and at all hours.

You say I may have not hit a winning formula. Can you elaborate on this?

Did your real estate investments not help you achieve FIRE at a quicker rate?


the_fixer

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Re: 1 percent or less
« Reply #16 on: December 02, 2016, 02:37:29 PM »
Going to ask this question here let me know if it is a hijack and I will post elsewhere.

I had planned to purchase a property to rent in the next few years and like the poster it is hard to find something that complies to the 1% in my area but what about the fact that someone else is paying for the property?

If you can rent it for enough to cover the mortgage and expenses you will eventually have a paid for property that you can sell or collect the rent on. It seems like the 1% rule never takes that into account?

for example

$200K house
20% down
15 years
$1320 Payment with taxes and insurance included @3.8%

Rent $1700

$380 Positive each month = $4560 each year that you can put in the bank to cover any issues. After the first few years you should have a decent amount built up to cover any potential issues.

Numbers with a 30 year loan
$200K house
20% down
30 years
$908 Payment with taxes and insurance included @3.8%

Rent $1700

$720 Positive each month = $8640 each year

In my case I would be putting the 20% down in free and clear cash so I am losing the potential to build value with that 20% but it seems like the end result would provide larger gains.

Still learning so thanks for entertaining my thoughts
« Last Edit: December 02, 2016, 03:07:56 PM by the_fixer »

mskyle

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Re: 1 percent or less
« Reply #17 on: December 03, 2016, 09:08:56 AM »
Yes, any property will *probably* be paid off in time (barring major market changes or the house becoming uninhabitable or something), but the 1% rule takes that into account. It's not a hard and fast rule, but a rule of thumb meant to take into account the risks, work, and other downsides of real estate investing.

When you invest in real estate you are taking on a couple of different kinds of risk:
* the price of the house could drop for any number of different reasons
* you still have to keep making mortgage payments even when the property is vacant and not earning you any money
* you are on the hook for any major repairs, which can run thousands of dollars

Real estate investing is generally more work than, for example, index investing - you need to identify and vet properties to buy, maintain them, and find and vet tenants to occupy the properties.

Also the transaction costs are very large (mortgage origination fees, realtor fees, etc.), and the wealth is not particularly liquid (you have to pay all those realtor fees if you want to convert the house into cash, and it might take months).

The idea behind the 1% rule is that a property is probably worth the risk, work, transaction fees, etc. if it meets the 1% rule. People make money all the time in sub-optimal investments. Buying a non-1% property isn't, like, a one-way ticket to bankruptcy. It just might not be the best thing you can do with your money.

the_fixer

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Re: 1 percent or less
« Reply #18 on: December 03, 2016, 12:17:41 PM »
Excellent explanation I appreciate it.

Xlar

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Re: 1 percent or less
« Reply #19 on: December 05, 2016, 09:48:54 AM »
(snipped)

$200K house
20% down
15 years
$1320 Payment with taxes and insurance included @3.8%

Rent $1700

$380 Positive each month = $4560 each year that you can put in the bank to cover any issues. After the first few years you should have a decent amount built up to cover any potential issues.

(Snipped)

Note that you are not including anything in your budget for maintenance, property management, vacancy, or cap ex. These are important to include and will fundamentally change your bottom line.

Lot's of people seem to pay for maintenance out of their W2 job and then claim that their rental is fantastic. Don't trick your self into thinking it's doing better than it is.

afam

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Re: 1 percent or less
« Reply #20 on: December 06, 2016, 01:13:44 AM »
Hello  JJ Saves,

I've got a question about the 1 percent rule.
In germany you got the rule, that if you buy a house the price is good at 20 years-net-cold-rent. In very good cities like Munich or Cologne a multiple of 25 is also a pretty good deal.
In your example you got a yearly (cold-?)rent of 16.800 . So your multiple would be 11,9. Why are your houses so extremly cheap to buy compared to renting?


And 3,87 % interest-rates is absoluty insane here. At the moment we get interest rates for houses between 0,7 - 1,8 %.



My current home of five years was purchased for 190,000. Taxes, mortgage, insurance, combined equals 1150 monthly. Prices have gone up significantly since then. My home is worth somewhere around 310-330,000 now. If i bought now in the same neighborhood I wouldn't be able to save half my income Id probably rent.

I would like to buy a rental property, however its very hard finding something that meets the 1 percent rule. Can you still make money on a property thats slightly less then 1 percent?

For example- Ruff estimates-  200,000 house
mortgage, taxes, insurance    -1,000 @ 3.87
Rent                                     -1400

Now those are just ruff estimates, however there is still potential to come up 400$ each month. The house dose not meet the one percent rule of 2000 rent. I can buy several over the next few years and triple my cash flow. I can find properties like these in CA, but not ones that actually meet the 1 percent rule.

Would buying a rental like the one I listed above make sense? The neighborhood is good, schools are some of the best in the Palm Springs, CA area.

havregryn

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Re: 1 percent or less
« Reply #21 on: December 06, 2016, 01:27:10 AM »
Hello  JJ Saves,

I've got a question about the 1 percent rule.
In germany you got the rule, that if you buy a house the price is good at 20 years-net-cold-rent. In very good cities like Munich or Cologne a multiple of 25 is also a pretty good deal.
In your example you got a yearly (cold-?)rent of 16.800 . So your multiple would be 11,9. Why are your houses so extremly cheap to buy compared to renting?


And 3,87 % interest-rates is absoluty insane here. At the moment we get interest rates for houses between 0,7 - 1,8 %.



My current home of five years was purchased for 190,000. Taxes, mortgage, insurance, combined equals 1150 monthly. Prices have gone up significantly since then. My home is worth somewhere around 310-330,000 now. If i bought now in the same neighborhood I wouldn't be able to save half my income Id probably rent.

I would like to buy a rental property, however its very hard finding something that meets the 1 percent rule. Can you still make money on a property thats slightly less then 1 percent?

For example- Ruff estimates-  200,000 house
mortgage, taxes, insurance    -1,000 @ 3.87
Rent                                     -1400

Now those are just ruff estimates, however there is still potential to come up 400$ each month. The house dose not meet the one percent rule of 2000 rent. I can buy several over the next few years and triple my cash flow. I can find properties like these in CA, but not ones that actually meet the 1 percent rule.

Would buying a rental like the one I listed above make sense? The neighborhood is good, schools are some of the best in the Palm Springs, CA area.

This I already asked once and would love to hear responses from someone who maybe has direct experience in both US and Europe. The 1% rule is something that would never, EVER happen in Europe.
My guess is higher cost of ownership (none of the EU countries I know have any real property tax, in Luxembourg we pay 17 a year for a 500 000 home lol) and a larger rental market (people seem more mobile in the US.

waltworks

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Re: 1 percent or less
« Reply #22 on: December 06, 2016, 11:01:53 AM »
The answer is that people are not good at investing, but even a crappy investment (house that doesn't make money) is still a form of enforced savings (paying the mortgage off) so it is financially beneficial to many people who would otherwise immediately blow their money.

If you are someone who has half a clue about this stuff, you can easily figure out that houses (regardless of where they are) that don't make money... (wait for it)... don't make money.

So to all the "there's no 1% rule stuff in my area!" folks: you are correct. Invest elsewhere or in some other asset than real estate.

If your local sandwich shop loses money, you don't say "well, people get rich investing in sandwich shops, but there are none of those magical profitable sandwich shops in my neighborhood, so I'm investing in this crappy one because obviously that invest-in-profitable-things rule is just silly." You invest in some other damn thing (or the sandwich shop in the next town over)!

-W

havregryn

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Re: 1 percent or less
« Reply #23 on: December 07, 2016, 01:56:45 AM »
But what we don't get, speaking from this context here, how does it ever pay off for anyone to rent if purchase prices are so low compared to renting? My only idea is that there is cost associated with owning that we don't have in Europe (property taxes, something else?) or that it is a lot easier to get a mortgage in Europe making it easier for people to buy...no idea, really, but the difference is fascinating.

Like, if I bought a house for 200 000 my monthly mortgage payment on a 25 year mortgage would be 800. And it appears from this rule that it would be theoretically possible to rent it out for 2000/month in a market like yours. Here that would simply never, ever happen, and the most you could legally rent out for would be 666 (both countries we own in have a legal limit to the rent you can charge as 4% return per year on the value of property) which is also probably the most you'd have a market for anyway (as it's already difficult to rent out if you max out your legal price), with some exceptions in very popular areas (where this would be a studio).
Ok, we have a lot lower interest rates but if I do a simulation with 3.5% interest it makes monthly payment a 1000. Still a long way from 2000, and we had those interest rates just 5-6 years ago and yet the differences between renting and purchasing were even smaller.

havregryn

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Re: 1 percent or less
« Reply #24 on: December 07, 2016, 02:01:57 AM »
Not to mention that if you could do a 1% rule rental here it would really not be a matter of debate if that made you money, it would indeed make you a lot of money and you could FIRE in one half of Europe with a rental in the other half.
Hence my theory that the only possible explanation for this is that there are significant owning costs in the US that cut into your profits and make it less obvious for others to prefer buying over renting.

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Re: 1 percent or less
« Reply #25 on: December 07, 2016, 05:02:15 AM »
When people start rationalizing the purchase of properties that are going to be cash flow negative because rents and values "are sure to go up," it's time for the astute investor to think about selling.

If your free and clear return from cash flow is two or three percent and leverage is around 5 percent, you have negative leverage.  You will be feeding an alligator.

Buy at today's prices with unrealistic expectations, and I will be buying your property at a much lower price in 5 to 10 years when you are forced to sell or the bank takes it.

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Re: 1 percent or less
« Reply #26 on: December 07, 2016, 09:10:32 PM »
Not to mention that if you could do a 1% rule rental here it would really not be a matter of debate if that made you money, it would indeed make you a lot of money and you could FIRE in one half of Europe with a rental in the other half.
Hence my theory that the only possible explanation for this is that there are significant owning costs in the US that cut into your profits and make it less obvious for others to prefer buying over renting.

The 1% rule is not met in all of the US. I primarily see the 1% rule being met in single family homes under $150k. If you have a duplex-4 plex the 1% rule can be met at much higher prices.

If you buy a house like you describe for $200k with a $800 mortgage then you are clearly losing money every single month if you can only rent it for $600.

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Re: 1 percent or less
« Reply #27 on: December 07, 2016, 11:26:11 PM »
Not to mention that if you could do a 1% rule rental here it would really not be a matter of debate if that made you money, it would indeed make you a lot of money and you could FIRE in one half of Europe with a rental in the other half.
Hence my theory that the only possible explanation for this is that there are significant owning costs in the US that cut into your profits and make it less obvious for others to prefer buying over renting.

The 1% rule is not met in all of the US. I primarily see the 1% rule being met in single family homes under $150k. If you have a duplex-4 plex the 1% rule can be met at much higher prices.

If you buy a house like you describe for $200k with a $800 mortgage then you are clearly losing money every single month if you can only rent it for $600.

But then as havregyn said why do more people in the USA not buy instead of renting?

But what we don't get, speaking from this context here, how does it ever pay off for anyone to rent if purchase prices are so low compared to renting? My only idea is that there is cost associated with owning that we don't have in Europe (property taxes, something else?) or that it is a lot easier to get a mortgage in Europe making it easier for people to buy...no idea, really, but the difference is fascinating.

Like, if I bought a house for 200 000 my monthly mortgage payment on a 25 year mortgage would be 800. And it appears from this rule that it would be theoretically possible to rent it out for 2000/month in a market like yours.


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Re: 1 percent or less
« Reply #28 on: December 08, 2016, 12:15:49 AM »
Not to mention that if you could do a 1% rule rental here it would really not be a matter of debate if that made you money, it would indeed make you a lot of money and you could FIRE in one half of Europe with a rental in the other half.
Hence my theory that the only possible explanation for this is that there are significant owning costs in the US that cut into your profits and make it less obvious for others to prefer buying over renting.

The 1% rule is not met in all of the US. I primarily see the 1% rule being met in single family homes under $150k. If you have a duplex-4 plex the 1% rule can be met at much higher prices.

If you buy a house like you describe for $200k with a $800 mortgage then you are clearly losing money every single month if you can only rent it for $600.

But then as havregyn said why do more people in the USA not buy instead of renting?

But what we don't get, speaking from this context here, how does it ever pay off for anyone to rent if purchase prices are so low compared to renting? My only idea is that there is cost associated with owning that we don't have in Europe (property taxes, something else?) or that it is a lot easier to get a mortgage in Europe making it easier for people to buy...no idea, really, but the difference is fascinating.

Like, if I bought a house for 200 000 my monthly mortgage payment on a 25 year mortgage would be 800. And it appears from this rule that it would be theoretically possible to rent it out for 2000/month in a market like yours.
https://en.m.wikipedia.org/wiki/List_of_countries_by_home_ownership_rate
Home ownership rates are much higher in the US than Germany:

Also, properties that actually meet the 1% rule are fairly rare in the US now.  I don't think I've ever seen a property for sale anywhere that I lived that met that rule.

afam

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Re: 1 percent or less
« Reply #29 on: December 08, 2016, 01:17:15 AM »
Not to mention that if you could do a 1% rule rental here it would really not be a matter of debate if that made you money, it would indeed make you a lot of money and you could FIRE in one half of Europe with a rental in the other half.
Hence my theory that the only possible explanation for this is that there are significant owning costs in the US that cut into your profits and make it less obvious for others to prefer buying over renting.

The 1% rule is not met in all of the US. I primarily see the 1% rule being met in single family homes under $150k. If you have a duplex-4 plex the 1% rule can be met at much higher prices.

If you buy a house like you describe for $200k with a $800 mortgage then you are clearly losing money every single month if you can only rent it for $600.

But then as havregyn said why do more people in the USA not buy instead of renting?

But what we don't get, speaking from this context here, how does it ever pay off for anyone to rent if purchase prices are so low compared to renting? My only idea is that there is cost associated with owning that we don't have in Europe (property taxes, something else?) or that it is a lot easier to get a mortgage in Europe making it easier for people to buy...no idea, really, but the difference is fascinating.

Like, if I bought a house for 200 000 my monthly mortgage payment on a 25 year mortgage would be 800. And it appears from this rule that it would be theoretically possible to rent it out for 2000/month in a market like yours.
https://en.m.wikipedia.org/wiki/List_of_countries_by_home_ownership_rate
Home ownership rates are much higher in the US than Germany:

Also, properties that actually meet the 1% rule are fairly rare in the US now.  I don't think I've ever seen a property for sale anywhere that I lived that met that rule.

Well the most important reason for the low home ownership in Germany are the costs. Building or buying a house costs far too much compared to renting and its kinda luxury. Also Building or buying a house in a big city is not in financial range for pretty much everyone. The average salary in germany is about 21k after taxes and social insurances for a household. A house costs between 250k in villages and up to 700k in cities.

havregryn

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Re: 1 percent or less
« Reply #30 on: December 08, 2016, 02:37:29 AM »
Not to mention that if you could do a 1% rule rental here it would really not be a matter of debate if that made you money, it would indeed make you a lot of money and you could FIRE in one half of Europe with a rental in the other half.
Hence my theory that the only possible explanation for this is that there are significant owning costs in the US that cut into your profits and make it less obvious for others to prefer buying over renting.

The 1% rule is not met in all of the US. I primarily see the 1% rule being met in single family homes under $150k. If you have a duplex-4 plex the 1% rule can be met at much higher prices.

If you buy a house like you describe for $200k with a $800 mortgage then you are clearly losing money every single month if you can only rent it for $600.

Well, buy to let mortgages are not as common here I think.  Most people who do these kind of things count more on the equity than cash flow (a lot of people are afraid of the stock market and the only way they feel they can invest in the long term is real estate).
In my example, of this 800, barely 200 is interest you pay, which you can then deduct on your tax. With the tax deduction you probably have a 0 yearly balance but the place is getting paid off and in 20 years it's yours to give your kids etc.
Here in Luxembourg the tenant is legally responsible for all except structural maintenance.
It's not an income source if you need a mortgage but it's not exactly a great money pit either. For people who dread the money markets probably the only way to "invest".

rachael talcott

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Re: 1 percent or less
« Reply #31 on: December 23, 2016, 06:09:46 PM »
My general "rule" is that I want at least 10% ROI (I pay cash, and I count legal fees, taxes, insurance, and long-term maintenance) and to increase my net worth at least $10K.  It often takes me a year to find one and I jump on it right away when I do.  Moving fast is key.  Never is there something just sitting on the market that is a good deal. 

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Re: 1 percent or less
« Reply #32 on: December 23, 2016, 06:43:52 PM »
The 1% "rule" is okay quick and dirty math but it doesn't apply to all rentals in all markets, or really, most rentals in most markets.  For example, budgeting CapEx of 10% of monthly rent is probably going to be vastly underestimated for a $50K property in a D neighborhood.  Conversely, 10% of monthly rent is probably going to be quite overestimated for a $1M property in an A neighborhood.

This is how people have 2%+ rentals that lose money and 0.6% rentals that make money. 

I find the in depth spreadsheets to be much more useful- you can build out real numbers quickly, particularly when you know the market you are looking at well.  What are actual taxes/sqft?  What are actual roof replacement costs/sqft?  Hot water heaters?  HVAC?  Figure out a realistic cash on cash return.


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Re: 1 percent or less
« Reply #33 on: December 27, 2016, 09:07:52 PM »
This thread is actually funny to me because I work in Toronto Canada and there's not a rental within 3 hours of here that would come even close to the 1% even if it was on fire.

The numbers we see around here are...

$1600 rent per month for a $500,000 condo
$1600 rent for a $450,000 townhouse

And people are going about this...

Investing in condos is a safe long term investment with a historical increase in property values significantly above inflation. As far as I am concerned there are 3 certainties in life...death, taxes and the fact that real estate value will always increase over time (at lease until we colonize other planets).

Having said that, I do not recommend "flipping" condos or looking at a condo as a short term investment. The costs of entering and exiting are just too high. For the long term though, condos in the 600-700 sf range in high quality areas are excellent investments.

Real Estate provides 3 powerful ways to earn a return:

1. Property value increase - As I had mentioned above the historical increase in property values is significantly above inflation. At any given time the Real Estate Market can be up or down, but over time it will always increase. The only time that you will lose money in real estate is when you are forced to sell.

2. Paying down your mortgage (building equity) - The rental market is incredibly strong, as are rental prices. This means that you can have someone else pay your mortgage down and build equity for you(hopefully without you spending a dollar on anything other than upkeep).

3. Monthly cash flow from rentals - While most new condo purchases yield are "break even" investment up front, as rental prices increase over time (all things equal) your mortgage payment should actually decrease, which will create a monthly cash flow that will grow year over year.

At this point I think the best thing to do would be to start a new forum to discuss the best projects, areas and units to look at for investments. See you over there.

I don't even... I've been stuck in Toronto specuvestor central for way too long. Sometimes I think I'm going a little nuts because cash flowing investments don't even exist around here... It's all about the appreciation. No one even cares about the rent $, Investors occasionally don't even pay insurance on their condos so they can cashflow.

Anyhow.




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Re: 1 percent or less
« Reply #34 on: December 28, 2016, 08:05:56 AM »
Posts like this one are good indications that it is time to sell.    When the economy shifts, and interest rates go up, the game will be over.

tralfamadorian

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Re: 1 percent or less
« Reply #35 on: December 28, 2016, 08:50:49 AM »
Posts like this one are good indications that it is time to sell.    When the economy shifts, and interest rates go up, the game will be over.

I agree that the market is starting to turn.  Ultra expensive markets have had a terrible year.  Some others have had much higher rental inventory in 2016 than has been seen during this market cycle, which according to the Mueller cycle is a leading indicator for the softening of the purchasing market.

But I still stand by my comment above that detailed costs spreadsheets >> 1% rule.

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Re: 1 percent or less
« Reply #36 on: December 28, 2016, 10:24:41 AM »
Detailed cost spreadsheets introduce bias.  Don't like the numbers?  Change them a little so the property works.

Profit comes from two sources, cash flow and appreciation.  The numbers on my neighbor's purchase of a $785k house in late 2011 with a 20 percent down payment are impressive, even though they live there and there is no cash flow.  Buying investment properties in a market that has reached the stratosphere and is affordable only to so-called investors is foolish.  At some point, the pools of buyers and renters thin and the games begin.

tralfamadorian

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Re: 1 percent or less
« Reply #37 on: December 28, 2016, 11:24:27 AM »
Detailed cost spreadsheets introduce bias.  Don't like the numbers?  Change them a little so the property works.

Yes, but can't you bias any of these methods?  The OP's situation is the prime example of people fudging the 1%- oh, I want 1% but this place is great so I'll take 0.9%. 

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Re: 1 percent or less
« Reply #38 on: December 30, 2016, 07:27:10 AM »
My current home of five years was purchased for 190,000. Taxes, mortgage, insurance, combined equals 1150 monthly. Prices have gone up significantly since then. My home is worth somewhere around 310-330,000 now. If i bought now in the same neighborhood I wouldn't be able to save half my income Id probably rent.

I would like to buy a rental property, however its very hard finding something that meets the 1 percent rule. Can you still make money on a property thats slightly less then 1 percent?

For example- Ruff estimates-  200,000 house
mortgage, taxes, insurance    -1,000 @ 3.87
Rent                                     -1400

Now those are just ruff estimates, however there is still potential to come up 400$ each month. The house dose not meet the one percent rule of 2000 rent. I can buy several over the next few years and triple my cash flow. I can find properties like these in CA, but not ones that actually meet the 1 percent rule.

Would buying a rental like the one I listed above make sense? The neighborhood is good, schools are some of the best in the Palm Springs, CA area.

Hey JJ,

Most of the your questions could be answered in this sticky post.
http://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/

That is how you analyze a property. I would use the 1% as a quick filter to figure out if the property is even worth analyzing. If it clears 1% or close, then run your real numbers.

After reading through this thread it makes my quite nervous to see people tossing together off the cuff hypothetical analysis. The real property comes into play after you get past PITI and factor in the costs that most people for get about (thankfully a few people have brought this up). Yes, if you forget about interests rates, CapEx, R&M, vacancy, property management, etc.

Real Estate can give life or kill your financials. Worried that we are getting to the point where it will mostly kill.

havregryn

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Re: 1 percent or less
« Reply #39 on: January 01, 2017, 07:30:24 AM »
Posts like this one are good indications that it is time to sell.    When the economy shifts, and interest rates go up, the game will be over.

The problem we have here in Luxembourg/Sweden (can't really speak for rest of Europe) and possibly also then in Toronto since it sounds similar is that even  if things turn sour it's not that likely that the great sale some people seem to be hoping for is going to happen. It's not that easy to get a mortgage loan (no NINJA loans here) so if you have a mortgaged investment property it means you're sitting on a lot of different assets (usually it's people who inherited their primary residence debt free which is something very common here), no bank would approve a loan otherwise , as well as that interest rates are really low (they can be less than 1% here) so people build equity really fast. In short I have a hard time seeing too many people panic selling or being forced to sell.
At the same time, it's not that likely that the renters pool will dry out easily, if an economic disaster strikes even more people will flock to the cities. Stuff can get a lot uglier for renters than it is now while keeping it easy going for the owners, because that's what third world  (i.e. economically and politically messed up) countries usually look like. I'd be more afraid to rent awaiting darker times in Europe than own even with a hefty mortgage. I could be wrong of course, the time will tell.