Austin property - nothing meets the one percent rule

[sockfight]

I'm thinking of buying my first investment property. I've spent a couple weeks reading blogs, this forum, and even creating a spreadsheet to model cash flow, taxes, appreciation, etc.

I live in Austin and am considering buying there for two reasons: I'd like to start without a property manager and I'm bullish on continued rapid appreciation.

Most sources I've read talk about the 1% rule for rent to price ratio. But when I look at SFHs, I'm not really seeing anything above .63%, and when I've looked at 2-4 units, I'm not seeing anything above 0.5%. This has been from looking at Redfin and using Zillow's rental section to guess at a rent price. Now, when I plug these kinds of properties into my model, I see that I would be cash flow negative for years while holding a property like this (which I could handle), but if appreciation is high (eg 8%), the IRR becomes high by year two.

My question is what to make of a market like this. Were one to follow the 1% rule, it would seem a market like Austin is to be avoided, but that doesn't feel right. Are there other perspectives on how to look at potential investment properties?

Thank you.

[Joel]

I live in California and don’t feel comfortable investing in real estate that is not near me. This same reason is why I have not invested in real estate... and that was before the covid run up.

[SwordGuy]

It depends on whether you want to make money by rents or whether you want to speculate on property appreciation.

If you want to make money by rents and none of the properties for sale in Austin meet the 1% rule, then either you look harder for better deals or you wait until Austin prices make sense or you invest elsewhere.

If you want to speculate on property appreciation and accept the cash flow risks of a negative cash-flow property, then proceed.

FYI - the 1% rule isn't a rule.   It's just a really fast way to discard clearly unsuitable properties.   Think of it as going to a party and meeting some folks.   Just met a mean drunk?   Toss them off your list of people to date.   That's the purpose of the 1% "rule".

Passing the 1% "rule" test just means there's nothing obviously wrong with the property AT FIRST GLANCE.   It doesn't mean it's a good investment.   Each property has to be evaluated individually with it's own set of cost and income numbers.

I recommend Gallinelli's book, "What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures"
It is focused solely on what the numbers are, how they are calculated, and how you can make reasonable estimates for the formulas you need to calculate.

[sockfight]

Thank you for that reply. Is it pure speculation? Would seasoned investors all steer clear of properties that aren't cash flow positive, and thus markets like that?

[Dicey]

I'm thinking of buying my first investment property. I've spent a couple weeks...

Bwahahaha!

Seriously, a couple weeks?

Dude, there is so much to learn and the height of a frothy market is possibly the worst time to jump in.

Advice from someone who's BTDT: take a lot longer than "a couple weeks" to study up on this. Don't forget to compare what might happen if you just threw the money you're wanting to spend into VTSAX or similar.

Your spreadsheet work does sound impressive. Take your time, keep doing your homework and you'll be fine.

[sockfight]

Thanks. I'm still very much in a learning mode. My question was basically whether there are any reasonable investors who would buy into a hot/rising market, or if just about everyone would steer clear.

And yeah, my spreadsheet compares returns to average stock market returns and computes after-tax real estate cash flow and gains too :)

[rmorris50]

Well hopefully buy and hold helps erase a lot of real estate mistakes.

One thing I’ve learned in life is to accept I’ll make mistakes no matter how much research I do. Just try to minimize it and learn.

I feel the 1 percent rule is kinda dead tho. Good luck trying to get that to work in any major city.


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[Paper Chaser]

Thanks. I'm still very much in a learning mode. My question was basically whether there are any reasonable investors who would buy into a hot/rising market, or if just about everyone would steer clear.

I live in a rural exurb of a medium sized city in the Midwest. So not Austin. I've watched a bunch of the landlords in my area that bought cheap, 1+% properties a decade ago unload a bunch of them in the last couple of years. They bought the properties cheap, held for strong cash flow for a few years, and unloaded when appreciation made selling too sweet to continue renting them out. I'd wager that many of their returns have beaten the general stock market during that time. They seem like the smart money to me.

I'm sure there are still investors buying in my area, but it seems like they're much more likely to:
1) be from out of state, and trying to capitalize on what they see as relatively cheap real estate prices
2) Rely solely on hopes of continued appreciation, because they likely live in places that never had 1% properties, so it's all they know.

A huge advantage of real estate over other asset classes is that you can have almost guaranteed cash flow on top of possible appreciation. You can run the numbers ahead of time and more or less know what your ROI will be. That's not likely with any other asset classes. But if the property isn't going to have that strong cash flow, and your investment rides almost entirely on hopes for appreciation, it's pretty much just speculation. And you can speculate on individual stocks, or any number of other things that won't have high holding costs and won't be time consuming and expensive to sell, and won't call you in the middle of the night for a toilet that won't stop running.

Personally, I've been watching my local market for a few years now with interest in finding an investment property. There have been just a handful of "ok" to "borderline decent" properties that I've elected not to pursue. It's just too simple to keep dumping extra money into equities, and the deals in RE aren't sweet enough to make me comfortable with pulling the trigger.

[sockfight]

Thank you for the comments, everyone.

A thought that has just occurred to me... I recently bought a house in Austin as my residence. Naturally, the primary reason for buying it was to live in it, not to chase further appreciation, so whether it appreciates dramatically is just a nice bonus. But perhaps I should take the perspective that I've already got a stake in the Austin market, and perhaps buying an investment property in the same market would be putting too many eggs in the same basket (the "I hope prices continue to rise" basket)...

That said, just since the subject of comparing it to the stock market has come up, I wanted to share: according to my calculations, if the stock market performs on average (8% after-tax annual returns) and the property appreciates conservatively (3% YoY), putting 20% down on a property with rent-to-price ratio of 0.50% and making normal, simple assumptions about other variables (maintenance costs, marginal tax rates, etc)... the real estate total after tax-return overtakes the market in year four.

[Metalcat]

Thank you for the comments, everyone.

A thought that has just occurred to me... I recently bought a house in Austin as my residence. Naturally, the primary reason for buying it was to live in it, not to chase further appreciation, so whether it appreciates dramatically is just a nice bonus. But perhaps I should take the perspective that I've already got a stake in the Austin market, and perhaps buying an investment property in the same market would be putting too many eggs in the same basket (the "I hope prices continue to rise" basket)...

That said, just since the subject of comparing it to the stock market has come up, I wanted to share: according to my calculations, if the stock market performs on average (8% after-tax annual returns) and the property appreciates conservatively (3% YoY), putting 20% down on a property with rent-to-price ratio of 0.50% and making normal, simple assumptions about other variables (maintenance costs, marginal tax rates, etc)... the real estate total after tax-return overtakes the market in year four.

Well, yeah, one is cash investing and the other is leveraged investing. Compare apples to apples, meaning leveraged investing vs leveraged investing, and you will see a different outcome.

FWIW, where I live, the 1% rule can't be met, and I've looked heavily into property investing for the past several years, and did buy a second property a few years ago, but ended up selling it shortly afterwards.

I agree with @Dicey that you should do A LOT more research before jumping into investment properties. There are so many ways for it to go sideways.

I was just eyeing a 1.7M building with 9 units in an exploding area where the lot alone will likely be worth a lot more than that in 5 years. However, it's an old building and whomever buys it needs to keep it afloat until then. Just thinking about the possible maintenance costs that could come up makes me feel queasy.

[sockfight]

Well, yeah, one is cash investing and the other is leveraged investing. Compare apples to apples, meaning leveraged investing vs leveraged investing, and you will see a different outcome.

That's a great point about the effect of leverage, but it begs the question: Can you and should you apply leverage the stock market? It seems riskier and generally not done because the collateral used to borrow money is typically other money (itself invested...) I'd love to hear if leveraging the stock market is ever considered savvy in practice.

[Metalcat]

Well, yeah, one is cash investing and the other is leveraged investing. Compare apples to apples, meaning leveraged investing vs leveraged investing, and you will see a different outcome.

That's a great point about the effect of leverage, but it begs the question: Can you and should you apply leverage the stock market? It seems riskier and generally not done because the collateral used to borrow money is typically other money (itself invested...) I'd love to hear if leveraging the stock market is ever considered savvy in practice.

Again, this is part of the process of researching and decision making when it comes to different investment options.

My point was that you can't just compare apples to oranges and call it a day. You want to fully understand your risk/benefit analysis for your particular situation when you start looking at various investment strategies.

I know TONS of people who jumped into rentals and are not better off for it just because they didn't fully appreciate or even understand their options.

Yes, there is risk when leveraging to invest, there is ALWAYS risk to leveraging to invest, the key is to be able to identify what risks are appropriate for your particular situation. 

A benefit of real estate is the incredibly favourable leverage terms. That's definitely a pro in the real estate investing column, but it's just one pro among all of the pros and cons.

[NonprofitER]

I think it depends on your goals - like others have said. 

FWIW, I have a primary residence and live in Austin, but choose to invest in rental properties in other markets in TX where I can meet (or close to meet) the 1%+ rule.  I aim for both cashflow and above average (but usually not gangbusters) appreciation. When I was researching, I looked at markets that had demonstrable economic stability, predicted economic growth, varied employment sectors (not 100% oil or military towns!), ideal rent-to-price ratios, good schools, etc. and narrowed down to a few markets within < 8hrs driving distance. I then spent a year visiting those markets, meeting/interviewing multiple investors and realtors in each area, etc.

We now have 2 duplexes and 1 SFH (5 units total) and are under contract for another duplex in west TX (Lubbock area). I self-manage our portfolio from about 6 hours away, which is possible with the right tools/strategies in place (online rent collection and maintenance request systems, Google Voice number, and a local realtor and property manager that I have a mutually beneficial relationships with and have negotiated "a la carte"/flat rate services for handling tenant screening, placement and turnover and "$hit hit the fan in the middle of the night" situations). Every RE investor's comfort level varies in terms of how close or far you feel you need to be to your properties, but I've found a comfortable middle ground in self-managing the day-to-day + outsourcing for one-off services during turnovers. We're now looking at other TX markets to diversify.

Austin is crazy-town right now in terms of RE prices. I cannot imagine buying a rental here at the moment for the kind of return we would get, but again, it depends on your goals. There's a lot of Austin-based FB RE Investor groups and networking events you could attend if you want to dig further. I only sporadically attend the all-female InvestHer Group in Austin, but Investor Underground (FB group) is an option if you're set on getting a feel for the ATX RE market.

[J.R. Ewing]

I'm in Houston.  I'm seeing values 0f ~.50% in y area.  On top of that, Houston has high property taxes and insurance costs.  No thanks.

[Jon Bon]

Would seasoned investors all steer clear of properties that aren't cash flow positive, and thus markets like that?

Yes.

Yes we would, and yes we do.

Don't get me wrong, it sucks that guys like yourself can't start investing and don't get me started on a whole generation of young people that are unable to buy their first home, but I was able too only 10 year prior.

Remember, in the last go round there were folks who were underwater on their homes for 10 years, that's a terrible place to be. You don't want to be that person.

Hey the market just tanked a about 2%. Who knows, maybe income producing assets might be reasonably valued again!

[sockfight]

There's a lot of Austin-based FB RE Investor groups and networking events you could attend if you want to dig further. I only sporadically attend the all-female InvestHer Group in Austin, but Investor Underground (FB group) is an option if you're set on getting a feel for the ATX RE market.

Thank you for recommending some groups to join, I will definitely look into that. I really appreciate it! It's also really helpful to see a little insight into your strategy in that you're looking well beyond Austin to find deals. I had read somewhere that Lubbock was currently a notable market. Out of curiosity, why limit yourself to Texas?

Yes we would, and yes we do.

Thank you, it's really helpful to hear this. It's really easy to get caught up in the frenzy and hype of a local boom.

[srad]

One thing you can look to get into in Austin is value add properties.  Buy a property that needs work and fix it up, add a bathroom or find a way to get an additional bedroom in there.  That is how you can make money in a highly appreciating market.

As for the 1% rule, its gone.  For a town such as yours, .5 to .65 is probably all you'll get.  If you can find one around .7, buy it. That's pretty much what the old 1% rule was.  Think about it, the 1% rule was around when interest rates were 7%.  They are now 3%, that changes the ratio.  You buy a few .6 or .7 properties in Austin and then in 15 years you'll be saying why didn't I buy more...

[soulpatchmike]

I always heard it as 10x rent.  Same idea, the purchase should be about 10x rent.  Pretty hard to find these for the reasons mentioned above and when you do find them, they can be in challenging neighborhoods to be a landlord.

srad is exactly right, if you buy one today at 15-20x rent(.6-.7), in 15 years you will wish you bought more.

[sockfight]

I think you must mean 100x rent, not 10x?

It's true that today's lower interest rates help a lot.

[NonprofitER]

Out of curiosity, why limit yourself to Texas?

Not limited to TX. It's just that TX has plenty of markets to invest in that are driving distance away from our ATX residence, and where I've already developed relationships with local realtors/ property managers/ contractors.

[cchrissyy]

it is smart to buy property in an area you know and understand and within easy reach of where you live. many people buying a first investment property make a mistake by not doing that.

but yes as you can see it is often true that the area you live is not suitable for buying investment property. so don't buy. wait until the market cools or you are living somewhere the numbers do make sense.

[soulpatchmike]

I think you must mean 100x rent, not 10x?

It's true that today's lower interest rates help a lot.

10x annual rent, sorry I reread my post and it was a bit unclear.  It is technically a bit less conservative than the 1% rule, but both are still difficult to find.

[WGH]

One thing you can look to get into in Austin is value add properties.  Buy a property that needs work and fix it up, add a bathroom or find a way to get an additional bedroom in there.  That is how you can make money in a highly appreciating market.

As for the 1% rule, its gone.  For a town such as yours, .5 to .65 is probably all you'll get.  If you can find one around .7, buy it. That's pretty much what the old 1% rule was.  Think about it, the 1% rule was around when interest rates were 7%.  They are now 3%, that changes the ratio.  You buy a few .6 or .7 properties in Austin and then in 15 years you'll be saying why didn't I buy more...

Agree with this. Look for foreclosures and property that needs some TLC/sweat equity to get a better return. Problem # 1 is it's not easy to find when everyone else looks at foreclosures and # 2 finding reliable contractors right now is damn hard especially in the smaller towns in TX where 1% homes may still pop up.

[rocketpj]

Where I live residential property is outrageously overpriced. 

Commercial property has different metrics and a much smaller buyer pool.  It doesn't even occur to most people.  I bought a commercial property in a red hot housing market that had 2x2 bedroom apartments in it, plus 42 other units, for less than I would have paid for a duplex.

If residential property is irrational, look at other options.  Look at rural property, look at commercial options.  Different risk issues but also the cost is usually reflective of the money you can make from it rather than how 'cute' it is or how close to a beach it is.

[clarkfan1979]

I really do not like using the 1% rule for many reasons. My biggest complaint is that the 1% rule doesn't consider the intrinsic value of the location, which is #1 in my book for purchasing real estate.

Some people claim that you need 1% rule for cash flow. Not true. The 1% rule does not guarantee cash flow because it does not consider the cost of property taxes and insurance. It's pretty easy to find 1% deals that don't cash flow due to high property taxes and/or insurance. That is often times why the purchase price is so cheap. For example, a home that I lived in as a child sold for 140K in 2012 and the property taxes were $7850/year.

Some people claim that the rental needs to meet the 1% rule so you have money in the bank to cover unexpected repairs. Yes, you need money in the bank for repairs. However, the money doesn't need to come from cash flow and it doesn't need to be a 1% house.

I bought a college rental that was not a 1% rule in 2007. However, with a low price, a good location (low vacancy), low property taxes and low insurance, it was still a good choice for me.

I bought an ugly house in May 2007 for 182K. Based on neighborhood comps, the lowest price for a similar home in similar shape was 177K. I was only 5K off from the very bottom. My original PITI was $1040/month with a 6% loan. In 2009, I did a re-fi to get the loan down to 4.75%. Now the PITI was $950.

Below is a summary of the market rent and appreciation. I am not including my rent collected because I often give discounts to good tenants that make my life easier. In the past I have been "soft" about raising the rent to market value. I'm getting better, but I still have alot of room to improve.

2007: 182K ($1400/month)
2008: 200K ($1450/month)
2009: 205K ($1500/month)
2010: 210K ($1550/month)
2011: 215K ($1600/month)
2012: 220K ($1650/month)
2013: 230K ($1700/month)
2014: 250K ($1800/month)
2015: 275K ($1900/month)
2016: 300K ($2000/month)
2017: 325K ($2200/month)
2018: 360K ($2400/month)
2019: 375K ($2500/month)
2020: 400K ($2450/month)
2021: 425K ($2450/month)

During the past 14 years, vacancy has been zero. Average repairs is around $1800/year or $150/month. In 2020-2021, I spent 7K on new flooring and paint, which I would consider a capital improvement. Roof is from 2002 and will need to be replaced in about 5-10 years.

My current loan is $261,500 at 3.5%. I did a re-fi in December 2020 to get my rate down from 4.625% to 3.5%. My current balance is $255,000. PI is $1174. Taxes are $210/month and insurance is $77/month. Total PITI is $1461 with $418/month going toward principle. Current rent is $2450/month, which is a little low. It took a hit during COVID-19, but I currently have good tenants and gave them a break on the rent to re-new the lease for one more year. Based on current comps, I will most likely increase the rent to $2600/month for August 2022.

I admit that the cash flow might not seem super impressive for owning something for 14 years. The main reason for this was because in 2018, I did a cash-out refi and got around 148K at closing (after considering one month of no mortgage due). I used the money to purchase house #2.

Since 2018, house #2 increased in value from around 650K to 975K. That home also provides cash flow of around $1300/month (after vacancy & repairs). I am trying to do a re-fi to get the rate from 4.5% to 3.5%. If successful, my payment will drop by $300/month. This home is not a 1% deal. Not even close. However, at a value of 975K, it has very low property taxes $3820/year and low insurance $1296/year.  Rent is currently $4850/month. Current PITI is $2875, but should be $2575 in 3-4 months after I re-fi from 4.5% to 3.5%. I will also have around $750/month going toward principle.

Sorry for the long post, but I think the info will be valuable for some.

[clarkfan1979]

One more thing to mention. One percent deals actually still exist in my county in which I primarily reside (Pueblo County, CO). You can buy houses for 90K that need 10K of repairs that rent for $1,000/month. However, as a percentage of purchase price, the property taxes are higher, insurance is higher and repair costs are higher (older homes). Cash flow is low and appreciation is low (high crime).

As a result, I avoid neighborhoods with 1% deals my own county.

[PMJL34]

Clark,

I agree with you about the 1% rule, but your real life rental example is just flat out bad.

425k value for $2450 after 15 years of ownership? I can buy a house today and do better than that day 1. Is there a reason you aren't selling the rental?

I think your example may scare new investors with those numbers. Not to mention it needing a roof soon/already.

[Jon Bon]

There's a lot of Austin-based FB RE Investor groups and networking events you could attend if you want to dig further. I only sporadically attend the all-female InvestHer Group in Austin, but Investor Underground (FB group) is an option if you're set on getting a feel for the ATX RE market.

Thank you for recommending some groups to join, I will definitely look into that. I really appreciate it! It's also really helpful to see a little insight into your strategy in that you're looking well beyond Austin to find deals. I had read somewhere that Lubbock was currently a notable market. Out of curiosity, why limit yourself to Texas?

Yes we would, and yes we do.

Thank you, it's really helpful to hear this. It's really easy to get caught up in the frenzy and hype of a local boom.

Keep in mind you are an investor. You are in it for the long term. Slow and steady wins the race.

Remember what happened to all the speculators the last go round in this game?

Lots of other assets to buy that can take advantage of your local boom. Do some research on that and let us know what you find. Hell get your inspectors license I'm sure you could charge a pretty penney in that market, and you would really get to know your local market and likely meet a bunch of people worth knowing.

[clarkfan1979]

Clark,

I agree with you about the 1% rule, but your real life rental example is just flat out bad.

425k value for $2450 after 15 years of ownership? I can buy a house today and do better than that day 1. Is there a reason you aren't selling the rental?

I think your example may scare new investors with those numbers. Not to mention it needing a roof soon/already.

Did you read my post regarding taxes and insurance? My PITI is $1461. Rent is $2450. I did take a small hit during COVID-19. I also gave current tenants a break on the rent to renew for one year because they are good tenants. Next year rent will be $2600. That puts me at $1,000/month of cash flow after vacancy and repairs.

It has appreciated from 182K to 425K over 14 years and has been easy to manage. That's why I have not sold. I used the cash flow to buy rental #2. I did a cash out re-fi on it to buy rental #3. I then did a cash out re-fi on rental #2 to buy my current primary home.

My original investment of 50K in real estate in 2007 is now 925K in 2021. Someone can always do better. However, I disagree that these numbers are "flat out bad"

I'm not trying to hit the 1% rule. I'm trying to build wealth.

[Paper Chaser]

Clark,

I agree with you about the 1% rule, but your real life rental example is just flat out bad.

425k value for $2450 after 15 years of ownership? I can buy a house today and do better than that day 1. Is there a reason you aren't selling the rental?

I think your example may scare new investors with those numbers. Not to mention it needing a roof soon/already.

Did you read my post regarding taxes and insurance? My PITI is $1461. Rent is $2450. I did take a small hit during COVID-19. I also gave current tenants a break on the rent to renew for one year because they are good tenants. Next year rent will be $2600. That puts me at $1,000/month of cash flow after vacancy and repairs.

It has appreciated from 182K to 425K over 14 years and has been easy to manage. That's why I have not sold. I used the cash flow to buy rental #2. I did a cash out re-fi on it to buy rental #3. I then did a cash out re-fi on rental #2 to buy my current primary home.

My original investment of 50K in real estate in 2007 is now 925K in 2021. Someone can always do better. However, I disagree that these numbers are "flat out bad"

I'm not trying to hit the 1% rule. I'm trying to build wealth.

The $925k in current value only matters if you're going to sell. And then you'd have to subtract the debt repayment from that. Looking at a $50k initial cash investment and counting leveraged funds/debt as part of the return seems wrong to me. It should be what you put in, and what you can get out. If you want to see your true gain, you should subtract any debt owed on the properties.

[srad]

I'm not trying to hit the 1% rule. I'm trying to build wealth.

That's a good one.   I'm going to use that from time to time 

[clarkfan1979]

Clark,

I agree with you about the 1% rule, but your real life rental example is just flat out bad.

425k value for $2450 after 15 years of ownership? I can buy a house today and do better than that day 1. Is there a reason you aren't selling the rental?

I think your example may scare new investors with those numbers. Not to mention it needing a roof soon/already.

Did you read my post regarding taxes and insurance? My PITI is $1461. Rent is $2450. I did take a small hit during COVID-19. I also gave current tenants a break on the rent to renew for one year because they are good tenants. Next year rent will be $2600. That puts me at $1,000/month of cash flow after vacancy and repairs.

It has appreciated from 182K to 425K over 14 years and has been easy to manage. That's why I have not sold. I used the cash flow to buy rental #2. I did a cash out re-fi on it to buy rental #3. I then did a cash out re-fi on rental #2 to buy my current primary home.

My original investment of 50K in real estate in 2007 is now 925K in 2021. Someone can always do better. However, I disagree that these numbers are "flat out bad"

I'm not trying to hit the 1% rule. I'm trying to build wealth.

The $925k in current value only matters if you're going to sell. And then you'd have to subtract the debt repayment from that. Looking at a $50k initial cash investment and counting leveraged funds/debt as part of the return seems wrong to me. It should be what you put in, and what you can get out. If you want to see your true gain, you should subtract any debt owed on the properties.

Current Real Estate Value = 2.05 million (4 properties)
Current Real Estate Debt = 1.125 million

Current Equity = 925K

My Kauai house is difficult to pull comps because inventory is so low. Median price of the Kauai County is 1.1 million. The median price of my district (Koloa) is 1.3 million. I'm conservatively estimating 975K. I recently painted the outside. It looks nice and all the repairs are finally done. 

Over the past 6 years I have spent about 75K of rental cash flow on living expenses. I also put 24K of cash flow into a ROTH over the past 2 years. If I re-invested every real estate dollar back into real estate, my true number would be over 1 million.

From August 2011 to August 2021 (10 years) my wife and I went from zero to 1.14 million. During this time we averaged 85K/year of income (W2 + rental income). I'm sure others have probably done better. However, I don't think I would put myself in the "just flat out bad" category.

I also disagree that current value only matters when you sell. You can do cash-out refi's to buy more real estate. I've done that twice.

[PMJL34]

Clark,

Don't you agree that you can sell your 425k college rental and buy another property that generates more than $2450/month? Even in this ridiculous seller's market, I know for a fact you can.

I'm saying this is a bad example because it is. I don't know what your argument is?

I think you are also neglecting the fact that you are riding a record breaking bull run. 99.9% of people who invested in real estate have done great recently. It's hard to take credit for that.

I think I've said it multiple times that I like your style (laid back, simple lifestyle, etc.). So it's definitely not a personal attack.
 

[clarkfan1979]

Clark,

Don't you agree that you can sell your 425k college rental and buy another property that generates more than $2450/month? Even in this ridiculous seller's market, I know for a fact you can.

I'm saying this is a bad example because it is. I don't know what your argument is?

I think you are also neglecting the fact that you are riding a record breaking bull run. 99.9% of people who invested in real estate have done great recently. It's hard to take credit for that.

I think I've said it multiple times that I like your style (laid back, simple lifestyle, etc.). So it's definitely not a personal attack.

I'm not taking anything on this forum personal. I am a teacher as a profession. When I feel like I have something to offer, I share it. I am also very comfortable going against social norms. This might come off as confrontational, but that is not my intention. I studied social norms in grad school for 7 years. I have found that the biggest opportunities are when you go against social norms.

I am not trying to convince anyone of anything or win an argument. I am simply trying to get people to see things from a slightly different perspective. I look at my rentals as a whole (Condition of house, neighborhood, new housing opportunities, taxes, insurance and yes purchase price and rent).

I really feel like too much emphasis is put on purchase price and rent. There is so much more to a rental than those two numbers. It's pretty simple to show a rental with less rent have higher profits due to lower costs and higher appreciation. Cheaper real estate typically has higher costs. That's why it's cheaper. Higher taxes, insurance, repairs, etc... = cheap purchase price.
 
Yes, I understand that it's possible to get more than $2450/month in rent on a 425K house. However, do you understand that getting more rent can actually result in less cash flow when you have higher vacancy, taxes, insurance and repairs?

There are 4 ways you make money on real estate every month. Cash flow, appreciation, principle pay down and tax advantages. Based on my observations, 90% of the discussions are only on one topic (cash flow). It's honestly distorted cash flow because taxes, insurance and interest rate are not given serious consideration.

Real estate is local. All real estate across the country does not go up or down at the same time. I bought my Fort Collins house for 182K in 2007 and in 2012 it was worth about 225K. I bought my Fort Myers house in 2012 for 95K. If I bought the Fort Myers house in 2007, I would have paid 250K for it. Then 5 years later, it would have been worth 95K.

Many people on this forum have been preaching to not buy real estate since 2015 because it's over priced. I ignored the noise and bought when I saw opportunity. In June 2018 I bought a house on Kauai for 603K and put about 50K into it. It's now worth about 975K. About 6 months ago most on this forum were telling me to sell it for 900K. I was told that there is a much better chance of it going down than going up. 100% disagree. 

I bought another house for 280K in November 2019. No rehab needed. It's now worth 350K. I refinanced and got 2.875%. My PITI is $1196/month. It's a 5 bed/3 bath house (2450 sq. ft.), oversized two car garage, shed and 1/4 mile from my sons school. 

Based on my personal experience my friends who own rentals, wealth is created with appreciation on rentals that don't require much of your time. It's easier to scale.

Cash flow is typically more consistent with linear thinking and more difficult to scale. Appreciation is more consistent with exponential growth and easier to scale. When humans are faced with an exponential growth curve, they don't believe it and label it luck. It's still math, it's just slightly different math.

It is possible to build a portfolio with 1% deals. However, the houses tend to be lower in price, needing more repairs and requiring more time. It's much more difficult to scale and I just don't see it happen in real life. Based on my personal experience, those who are really big on the 1% rule typically don't own any rentals.



 

 

[srad]

I think you are also neglecting the fact that you are riding a record breaking bull run. 99.9% of people who invested in real estate have done great recently. It's hard to take credit for that.

Everything is on a record breaking bull run, everything.  What are you doing with your stock position?  Still investing since we are clearly at the top?  Of course you are.  (Im being sarcastic about being at the top, i have no idea where we are on this run but I'm hoping for more).

To call those who have purchased real estate "Lucky" about their timing?  That's a little insulting, luck didn't make Clark (and me) wealthy, Action did.. Thomas Edison has one of the best quotes "Opportunity is missed by most people because it is dressed in overalls and looks like work".  You need to have down payment money, 6 months of mortgage payments available for all your properties, and most importantly time, lots and lots of time to buy properties.  I have properties with rent to value that are between .5  and .75.  Do you want to guess which ones I spend the most time managing and have made the least amount of money on via appreciation? (the higher rent to value ones).  I'm fine not collecting a few extra hundred dollars each month if I have some properties that have grown from 200k to 600k.  I'm willing to bet my best performing property that in another 20 years all of my values will have more than doubled from what I purchased them at.  They will almost all of been paid off (by the tenants) and I'll be doing great.

This site is all about delaying gratification, build that stash then say peace out world. By grabbing solid homes in desirable (appreciating) markets is just another way to do this.  1% or not. 

Our biggest risk on these .5 properties is if we mortgaged our properties to the hilt at these new highs and then a crash came, home prices and rents.  That would sting,  but if we have reasonable mortgages on them and prices drop, nothing changes for us... This recent run up has been nothing short of amazing.  Looking forward to see what this upcoming round of inflation has in store for real estate investors.  Remember, inflation = higher rents, but my mortgage says the same.

[PMJL34]

Hi Clark and Srad,

I appreciate the discussion. Clark, 7 years in grad school's gotta be a record :)

A little about me, I live in a VHCOL city here in the bay area and we're lucky to have a .5% purchase price to rent ratio. Both my properties are nowhere near the 1% rule. I purchased homes in 2014 as well as 2021 and doing very well. I am not someone who is saying not to buy since prices are higher than 2009-2011 lows. And yes, both of my properties have appreciated significantly. And yes, I still buy index funds :)

A couple of things:
1. Cashflow, principle pay down, and tax advantages happen on every property, some better than others. Appreciation is a separate category.
2. Unless it's forced appreciation (putting money and/or time in), no you cannot take credit for appreciation. Even then, a lot of luck is involved.

The issue with both of you talking about appreciation is that, IMO, it should be the least important aspect of owning rentals. I say this because:
1) Appreciation is out of my control. If it happens, then great! It's the cherry on top, but not something I count on.
2) I am a long term investor and not looking to sell.

Also, the biggest issue with appreciation is that it is "speculative." It's what leads investors in my area to buy 2 million dollars homes to rent out for $5500/month in hopes that after the one year lease the price will have doubled. It's a dangerous game.

Personally, I buy properties that will do great with or without appreciation and that is why the 1% rule guideline is very helpful.

For perspective, should any index funds investor be claiming to be geniuses because they have been investing since 2009? Absolutely not, IMO. They are simply riding a wave they cannot control. I apply a similar perspective to those claiming they made "great decisions" buying homes during this same period. It's a wave and let's just be thankful the wave pushed us up, not down.

EDIT:

One more thing:

I agree Clark that if you focus solely on the 1% rule, then you can very well end up buying a home that has zero chance of appreciation. I wouldn't advise this either. So yes, there is a balance between owning homes in nice locations with potential rather than getting the absolute best purchase price to rent ratio. However, I think most of us are aware of this and encourage others to shy away from 50K homes that rent for $500.
 

[srad]

I think we are all agreeing on the same things that make real estate a good investment, its just some of us put those things in different order. 

Just because I don't grab a 1% rule home doesn't mean I'm speculating.  The house still has to be able to maintain its debt service and repairs and leave a little left over for me at the end of the month.  I'm not talking about buying a 2mm home and renting it for 8k, that is either A, speculating, or B a tax write off for the very rich.  I"m talking about buying quality homes for average Americans in areas where people want to live and the population is growing.  That's not speculating, that being an educated (experienced) buyer. - Austin is one of those cities right now.

If you are a buy and hold investor and the property can carry its self, you most likely aren't going to lose money.  Lets say I have a .5 property that ends up with zero appreciation.  Well, in 30 years I'll still have a house that was paid off by my tenant, and I'll still be receiving rent.  What are odds that you think a house will have zero appreciation that is in a desirable area to live?   I'll take those odds. 

[clarkfan1979]

Hi Clark and Srad,

I appreciate the discussion. Clark, 7 years in grad school's gotta be a record :)

A little about me, I live in a VHCOL city here in the bay area and we're lucky to have a .5% purchase price to rent ratio. Both my properties are nowhere near the 1% rule. I purchased homes in 2014 as well as 2021 and doing very well. I am not someone who is saying not to buy since prices are higher than 2009-2011 lows. And yes, both of my properties have appreciated significantly. And yes, I still buy index funds :)

A couple of things:
1. The 1% rule does take into account property taxes, insurance, vacancy, maintenance, and etc.  I agree it does not take into account location (which is the huge) nor does it take into account appreciation.
2. Cashflow, principle pay down, and tax advantages happen on every property, some better than others. Appreciation is a separate category.
3. Unless it's forced appreciation (putting money and/or time in), no you cannot take credit for appreciation. Even then, a lot of luck is involved.

The issue with both of you talking about appreciation is that, IMO, it should be the least important aspect of owning rentals. I say this because:
1) Appreciation is out of my control. If it happens, then great! It's the cherry on top, but not something I count on.
2) I am a long term investor and not looking to sell.

Also, the biggest issue with appreciation is that it is "speculative." It's what leads investors in my area to buy 2 million dollars homes to rent out for $5500/month in hopes that after the one year lease the price will have doubled. It's a dangerous game.

Personally, I buy properties that will do great with or without appreciation and that is why the 1% rule guideline is very helpful.

For perspective, should any index funds investor be claiming to be geniuses because they have been investing since 2009? Absolutely not, IMO. They are simply riding a wave they cannot control. I apply a similar perspective to those claiming they made "great decisions" buying homes during this same period. It's a wave and let's just be thankful the wave pushed us up, not down.

EDIT:

One more thing:

I agree Clark that if you focus solely on the 1% rule, then you can very well end up buying a home that has zero chance of appreciation. I wouldn't advise this either. So yes, there is a balance between owning homes in nice locations with potential rather than getting the absolute best purchase price to rent ratio. However, I think most of us are aware of this and encourage others to shy away from 50K homes that rent for $500.

I think we are close enough that we understand one another. Not trying to win the argument. I agree with 75% of what you said.

I did want to mention a few things to consider going forward. Real estate has many different paths.

1) I don't agree that appreciation is all based on speculation. You can still have speculation without appreciation. For example, if you buy a high cash flow rental and you assume that it will not appreciate, that is still speculation. You are forecasting out into the future. You are speculating that the rent will not go down. However, that is still speculation. You have no way of guaranteeing anything about the rent going forward in the future.

2) When I bought my two college rentals, I was working at the University and I read the 10-year master plan. I was very aware of how each University wanted to grow physically and with it's students. If you want to call this speculation. Fine. However, I call it educating myself to make the best decision. Both Universities put in their report that they will not be able to keep up with student housing demand and therefore students will have to look off campus for housing. The Fort Collins rental is within 1/2 mile of campus. There is no way to build more single family homes within 1 mile of campus. All the land is gone. That is fundamentally different from my Fort Myers rental. The Fort Myers rental is 4.5 miles from campus and there is tons of land available to develop within 4.5 miles from campus.

3) Right now the Fort Myers rental is doing better in the short-term because of COVID-19. Lots of people moving to FL and not enough houses. However, the land is available. It will take a few years, but they will build the houses. Hell, they might even overbuild and we get another housing crash. It's the Florida way. However, long-term, the Fort Collins rental is going to do better due to scarcity of land. If you want to call that speculating, that is fine. However, I call it common sense. 

4) CSU Fort Collins is only 10% state funded. They need tuition dollars and private money to pay most of the bills. They need growth similar to a corporation to survive. Not just student growth, but all revenue streams. Florida Gulf Coast University is 55% state funded. They can pay all of their bills with state money. They do not need any growth to survive. 

There are just some of the reasons on how I make my decisions. My investing style and thinking is more long-term buy and hold. It's possible to also make money buying and selling at a fast pace (flipping). However, that's not me. 

[MrMoneySaver]

Where I live, I don't think you could get anywhere near the 1 percent rule. And yet, many times per month I see properties sell and then a few days later go up for rent on Zillow. Clearly a lot of investors don't follow the 1 percent rule.

[srad]

When you invest your money in any part of the stock market.  What exactly are you investing it for?  That the stock price will rise (ok and some dividend payout).  But isn't that speculation?  And all of us here on this site are investing in some form of the stock market.  So are we all wrong buying stocks/funds with the expectation that the price will go up?

We invest assuming there will be a historical average growth of X%.  Look at any post on this forum about the market, everyone says market had done x% for the life of it.   You know what else has a historical average growth rate?  Real estate that I can buy with a 4 to 1 leverage and have the tenant pay down the debt for me.

I'll take a chance with a property I have control over vs any market investment.  I have several shares of Starbucks and Apple. No matter how many latte's or Iphones I buy, I can't control the price of those stocks.  But I can redo a bathroom, update the flooring or brighten up a kitchen and raise the rent.  Or I can 1031 a highly appreciated property into several better rent to value properties when/if I need more cashflow  Or I could just flat out payoff my mortgages for the increased cashflow.

Point being, I like being in control of some of my investments.  its more work for sure, but I enjoy it and so far, its done well for me.  I guess we can revisit this topic in another 10 years, see how we all end up.

[PMJL34]

Clark,

I hear you that we can do our homework on an area of interest to see if there is growth potential. Again, I call that speculation. I'm sure majority of universities want to expand.  I'm sure majority of businesses want to expand. Probably 0 entities will have a 10 year master plan of "we're making too much money, let's downsize. Let's become smaller." Again, you got lucky that it's been a bull market for the past decade plus. No one could have predicted this, not even you and hence you shouldn't take credit for it.

If you would have bought a property that was say .5% and due to unforeseen circumstances, the market did not do well or regressed, then you would have lost money monthly and never been able to expand your rental portfolio and most likely would have just sold.

On the other hand, if someone would have bought a property closer to the 1% or higher and due to unforeseen circumstances, the market did not do well or regressed, that person would still been well off and most likely would have been able to buy more rentals.

With or without appreciation, if your rental was close to 1% or higher, you would have made money. the .5% you would have been screwed.

Here's another example, someone could have purchased using your logic/reasoning Clark and purchased a rental on 1/1/2020. They read the 10
 year university master plan, and spoke with the damn mayor, governor, and the president and was guaranteed there would be growth...Then boom, COVID happened and the university went to online learning and the rents dropped like a stone and they had to sell at the end of the year.

Is that because they are stupid/uneducated/didn't do their homework? No, they did exactly what you did Clark. Timing is everything. We get lucky sometimes, we get unlucky sometimes. It is what it is. Clark, you could have very well been here in 2021 saying that you did your homework, but the university couldn't grow despite their master plan and you had to sell your rental.

[PMJL34]

Srad,

I love Austin. I agree it's a hot city and has been for over a decade. However, neither of us have any idea what is going to happen to Austin in the future. Therefore, I suggest you buy homes that are cashflow positive and closer to 1% than not.

The historical growth of real estate is something miniscule like 2%. IIRC it's neck and neck with inflation, if that. The historical growth of stocks is 10% (or 7% when adjusted).

Yes, real estate gives us more control over our asset compared to stocks. But I'm not interested in comparing stocks to real estate returns at this time. All I'm saying is index funders can't claim to be geniuses because the market went up. And neither should real estate investors claim to be geniuses because their rentals appreciated.

[srad]

The whole what does better real estate or stocks?  I don't care which one wins, I'm heavily invested in both.    But If you are saying you can't count on appreciation for real estate then you can't count on appreciation for stocks.

2% housing appreciation = 8% with a 25% down payment.

I"m far from genius, but I am a very hard worker, and work is going to make me wealthy, not luck. 

You said you have some properties in a VHCOL, you will do just fine in life too.

[clarkfan1979]

Clark,

I hear you that we can do our homework on an area of interest to see if there is growth potential. Again, I call that speculation. I'm sure majority of universities want to expand.  I'm sure majority of businesses want to expand. Probably 0 entities will have a 10 year master plan of "we're making too much money, let's downsize. Let's become smaller." Again, you got lucky that it's been a bull market for the past decade plus. No one could have predicted this, not even you and hence you shouldn't take credit for it.

Different colleges do predict different rates of growth in their 10-year plan. Some do plan on 0% growth. They pay the bills with state money. Over the past 5 years CSU Fort Collins has probably spent 500 million on new buildings. Approximately 250 million of that was a new football stadium. Florida Gulf Coast University has probably spent about 50 million. When colleges commit to projects, the money gets earmarked for specific projects. If a recession happens, they still build the buildings

If you would have bought a property that was say .5% and due to unforeseen circumstances, the market did not do well or regressed, then you would have lost money monthly and never been able to expand your rental portfolio and most likely would have just sold.

You need to be more specific in this example.

On the other hand, if someone would have bought a property closer to the 1% or higher and due to unforeseen circumstances, the market did not do well or regressed, that person would still been well off and most likely would have been able to buy more rentals.

Like I said before, you can actually get better cash flow from a .5% property than a 1% property. It depends on taxes, insurance, mortgage rates and vacancy

With or without appreciation, if your rental was close to 1% or higher, you would have made money. the .5% you would have been screwed.

It's important to have cash reserves for any rental. The emergency money can come from anywhere. It doesn't need to come from the the magical land of 1%.

Here's another example, someone could have purchased using your logic/reasoning Clark and purchased a rental on 1/1/2020. They read the 10
 year university master plan, and spoke with the damn mayor, governor, and the president and was guaranteed there would be growth...Then boom, COVID happened and the university went to online learning and the rents dropped like a stone and they had to sell at the end of the year.

This did happen. I have two college rentals. I advertised in May 2020 for August 2020 occupancy. It was definitely new territory. For one college rental, I kept the rent the same. For the other, I dropped the rent by $50. You need to buy property that protects your downside. It's been the worst thing in real estate for me over the past 14 years. I lowered the rent by $50. Do I get any credit for that, or was it just luck?

Is that because they are stupid/uneducated/didn't do their homework? No, they did exactly what you did Clark. Timing is everything. We get lucky sometimes, we get unlucky sometimes. It is what it is. Clark, you could have very well been here in 2021 saying that you did your homework, but the university couldn't grow despite their master plan and you had to sell your rental.

Luck always plays a role. Nothing is guaranteed. However, there is a skill set to being successful over the long term. I have landlord friends that are way better at this game than me. Every year they do better than me. Do I attribute it to luck or that they are just flat out better?

I have other friends that are really bad at real estate because they do not value it and do not spend the time to understand it. One friend bought a house in October 2020. He couldn't be on the loan with his wife because his credit is still hurting from a short sale in 2015. He bought the house in 2003. Within the same circle of friends, I have another friend who bought a townhouse in 2009 as a foreclosure for 150K. He probably put 10K of repairs into it. He didn't over pay. He got a deal. However, there was very little appreciation potential because the HOA and taxes are very high. Approximately, now 12 years later the townhouse is worth 180K. He paid it off and is not financially stressed. However, he is not exactly killing it in real estate. He doesn't care. It's not his game.

Rentals have good years and bad years. I look at a rental over a 30 year time period. I would never take a snapshot of a rental on one specific year and tell someone to sell. You need the entire story to make a decision like that.


Don't take this as a personal attack because it's not. I have been having this same debate for about 3 years now. My biggest compliant that is that  people who are strong advocates for the 1% rule don't actually own  any 1% deals. Most don't own any rentals. You have one rental. That is one more than most. I have given people the opportunity to show how they have build their portfolio with cash flow with 1% deals . However, I still have not been given the opportunity to see anything from anyone. It's been all theoretical.
.
I really like  the idea of comparing notes in 10-years. I've been here since 2014 and I like it. I will most likely be here in another 10 years.  Lets continue to share notes and help each other out.

[Paper Chaser]

Clark,

I agree with you about the 1% rule, but your real life rental example is just flat out bad.

425k value for $2450 after 15 years of ownership? I can buy a house today and do better than that day 1. Is there a reason you aren't selling the rental?

I think your example may scare new investors with those numbers. Not to mention it needing a roof soon/already.

Did you read my post regarding taxes and insurance? My PITI is $1461. Rent is $2450. I did take a small hit during COVID-19. I also gave current tenants a break on the rent to renew for one year because they are good tenants. Next year rent will be $2600. That puts me at $1,000/month of cash flow after vacancy and repairs.

It has appreciated from 182K to 425K over 14 years and has been easy to manage. That's why I have not sold. I used the cash flow to buy rental #2. I did a cash out re-fi on it to buy rental #3. I then did a cash out re-fi on rental #2 to buy my current primary home.

My original investment of 50K in real estate in 2007 is now 925K in 2021. Someone can always do better. However, I disagree that these numbers are "flat out bad"

I'm not trying to hit the 1% rule. I'm trying to build wealth.

The $925k in current value only matters if you're going to sell. And then you'd have to subtract the debt repayment from that. Looking at a $50k initial cash investment and counting leveraged funds/debt as part of the return seems wrong to me. It should be what you put in, and what you can get out. If you want to see your true gain, you should subtract any debt owed on the properties.

Current Real Estate Value = 2.05 million (4 properties)
Current Real Estate Debt = 1.125 million

Current Equity = 925K

My Kauai house is difficult to pull comps because inventory is so low. Median price of the Kauai County is 1.1 million. The median price of my district (Koloa) is 1.3 million. I'm conservatively estimating 975K. I recently painted the outside. It looks nice and all the repairs are finally done. 

Over the past 6 years I have spent about 75K of rental cash flow on living expenses. I also put 24K of cash flow into a ROTH over the past 2 years. If I re-invested every real estate dollar back into real estate, my true number would be over 1 million.

From August 2011 to August 2021 (10 years) my wife and I went from zero to 1.14 million. During this time we averaged 85K/year of income (W2 + rental income). I'm sure others have probably done better. However, I don't think I would put myself in the "just flat out bad" category.

I also disagree that current value only matters when you sell. You can do cash-out refi's to buy more real estate. I've done that twice.

I'm glad that it's worked out for you thus far and hope that continues. I also appreciate your overall outlook of fitting your investments into the life you have and the life that you want.
That being said, I don't see how relying on appreciation is really actionable advice for a person that might be considering an investment property. It's entirely out of the owner's control unless they're putting money and work into the place too. The control is the biggest advantage of RE for me. Controlling/knowing the return to expect is what sets RE apart from other asset classes in my opinion. Having that monthly cash flow is what can pay your bills in retirement. Appreciation won't do that unless you're selling. If I'm just going to speculate on something appreciating in value that's out of my control, then there are tons of individual stocks that I can pick that are a lot less work and don't require as much time/effort or debt.
And speaking of debt, having 1.1 million in debt with an average income of $85k including rental income seems extra precarious to me. Maybe I'm wrong, but I'd personally never be comfortable tempting fate that way. You've been able to make it work thus far though, so good for you. I'm just not sure it's good advice for a newcomer.

[Jon Bon]

When you invest your money in any part of the stock market.  What exactly are you investing it for?  That the stock price will rise (ok and some dividend payout).  But isn't that speculation?  And all of us here on this site are investing in some form of the stock market.  So are we all wrong buying stocks/funds with the expectation that the price will go up?

We invest assuming there will be a historical average growth of X%.  Look at any post on this forum about the market, everyone says market had done x% for the life of it.   You know what else has a historical average growth rate?  Real estate that I can buy with a 4 to 1 leverage and have the tenant pay down the debt for me.

I'll take a chance with a property I have control over vs any market investment.  I have several shares of Starbucks and Apple. No matter how many latte's or Iphones I buy, I can't control the price of those stocks.  But I can redo a bathroom, update the flooring or brighten up a kitchen and raise the rent.  Or I can 1031 a highly appreciated property into several better rent to value properties when/if I need more cashflow  Or I could just flat out payoff my mortgages for the increased cashflow.

Point being, I like being in control of some of my investments.  its more work for sure, but I enjoy it and so far, its done well for me.  I guess we can revisit this topic in another 10 years, see how we all end up.

Apples and Oranges. You can always sell 10% of your stock holdings you cant really sell 10% of a house. If you are buying to redo a bathroom or lighten up the kitchen you are buying a job.  Don't get me wrong, I do this, but with the expectation of higher cash flow NOT appreciation which probably likely happens as well.

Furthermore. All growth stocks (speculator) eventually turn into dividend (cash flow)*

So no I don't invest in the stock market to speculate. If the only reason to buy something is to sell it to someone else at a higher price then you are simple looking for the greater fool. And in that case I have some tulips to sell you.

*if anyone comes back at me with Berkshire I will send you an internet facepunch.

[clarkfan1979]

Clark,

I agree with you about the 1% rule, but your real life rental example is just flat out bad.

425k value for $2450 after 15 years of ownership? I can buy a house today and do better than that day 1. Is there a reason you aren't selling the rental?

I think your example may scare new investors with those numbers. Not to mention it needing a roof soon/already.

Did you read my post regarding taxes and insurance? My PITI is $1461. Rent is $2450. I did take a small hit during COVID-19. I also gave current tenants a break on the rent to renew for one year because they are good tenants. Next year rent will be $2600. That puts me at $1,000/month of cash flow after vacancy and repairs.

It has appreciated from 182K to 425K over 14 years and has been easy to manage. That's why I have not sold. I used the cash flow to buy rental #2. I did a cash out re-fi on it to buy rental #3. I then did a cash out re-fi on rental #2 to buy my current primary home.

My original investment of 50K in real estate in 2007 is now 925K in 2021. Someone can always do better. However, I disagree that these numbers are "flat out bad"

I'm not trying to hit the 1% rule. I'm trying to build wealth.

The $925k in current value only matters if you're going to sell. And then you'd have to subtract the debt repayment from that. Looking at a $50k initial cash investment and counting leveraged funds/debt as part of the return seems wrong to me. It should be what you put in, and what you can get out. If you want to see your true gain, you should subtract any debt owed on the properties.

Current Real Estate Value = 2.05 million (4 properties)
Current Real Estate Debt = 1.125 million

Current Equity = 925K

My Kauai house is difficult to pull comps because inventory is so low. Median price of the Kauai County is 1.1 million. The median price of my district (Koloa) is 1.3 million. I'm conservatively estimating 975K. I recently painted the outside. It looks nice and all the repairs are finally done. 

Over the past 6 years I have spent about 75K of rental cash flow on living expenses. I also put 24K of cash flow into a ROTH over the past 2 years. If I re-invested every real estate dollar back into real estate, my true number would be over 1 million.

From August 2011 to August 2021 (10 years) my wife and I went from zero to 1.14 million. During this time we averaged 85K/year of income (W2 + rental income). I'm sure others have probably done better. However, I don't think I would put myself in the "just flat out bad" category.

I also disagree that current value only matters when you sell. You can do cash-out refi's to buy more real estate. I've done that twice.

I'm glad that it's worked out for you thus far and hope that continues. I also appreciate your overall outlook of fitting your investments into the life you have and the life that you want.
That being said, I don't see how relying on appreciation is really actionable advice for a person that might be considering an investment property. It's entirely out of the owner's control unless they're putting money and work into the place too. The control is the biggest advantage of RE for me. Controlling/knowing the return to expect is what sets RE apart from other asset classes in my opinion. Having that monthly cash flow is what can pay your bills in retirement. Appreciation won't do that unless you're selling. If I'm just going to speculate on something appreciating in value that's out of my control, then there are tons of individual stocks that I can pick that are a lot less work and don't require as much time/effort or debt.
And speaking of debt, having 1.1 million in debt with an average income of $85k including rental income seems extra precarious to me. Maybe I'm wrong, but I'd personally never be comfortable tempting fate that way. You've been able to make it work thus far though, so good for you. I'm just not sure it's good advice for a newcomer.

I think my overall strategy might not be a good fit for this forum because many here are are trying to figure out a way to quit their job asap. To quit your job asap, more focus will be put on cash flow than appreciation. This is probably why this forum leans toward the 1% rule. However, I want the newbies to know that just because you hit the 1% rule, it doesn't guarantee cash flow. Some properties are cheap because other expenses are really high (taxes, insurance, HOA, etc...)

I will most likely transition into buying apartments in the next 5-10 years. For me personally, the 1% rule has much more application for apartments.

I don't understand the idea of having control over rent, but not appreciation. Could you provide an example? I actually experienced the opposite this past year with my Kauai rental. I made some improvements, which increased the value of the house. However, I was not allowed to increase the rent on current tenants. I could have sold at any time. However, I couldn't legally raise the rent.

Over the past 10 years, we averaged 85K/year of income. For 2021, it's going to be around 90K. It would have been 95K, but we "lost" 5K of rental income when we stayed at our Kauai house for 6 weeks.

I agree that have 1.1 million of real estate debt and 85K/year of income is not typical. However, just because it's not typical doesn't mean it's risky. To assess risk, at a minimum you need add in cash reserves, equity position and savings rate.

[PMJL34]

1.1 million in debt with 85k/year of income is the definition of risky. You have an extremely risky investment strategy. Again, it's been working for you, but it's very risky.

Just cause you have cash reserves doesn't make a certain investment any less risky. It just means you bought a risky investment, but you can bail yourself out if needed. You can't say I bought a shitload of bitcoin, but it's not risky because you have plenty of reserves. Come on man.

EDIT: and to be transparent....I do very similar investments to you, but I don't tell others it's wise or that I was smart. I'm simply lucky as well. I acknowledge that I am playing with fire.

[Paper Chaser]

I think my overall strategy might not be a good fit for this forum because many here are are trying to figure out a way to quit their job asap. To quit your job asap, more focus will be put on cash flow than appreciation. This is probably why this forum leans toward the 1% rule. However, I want the newbies to know that just because you hit the 1% rule, it doesn't guarantee cash flow. Some properties are cheap because other expenses are really high (taxes, insurance, HOA, etc...)

Yes, income from rental properties is the goal for most around here. Really, it should be the goal for all RE investors, it's just that some tolerate properties with less income in hopes that they'll have good luck with appreciation. That approach has worked well for pretty much every real estate investor in the last decade, so stories about people that were over leveraged and got burned have faded in our memories. But there were a lot of people 12-15 years ago that got burned with that strategy. I think the simple thought, is that more cash flow is always better no matter what your strategy is or how you make the numbers work. 1% properties tend to have stronger cash flow than properties with less than 1%.

I do agree with you that the 1% rule does not guarantee success. The 1% rule for me is just a quick tool to see if a property might be worth looking into further. It's also seems to typically break down as the "break even point" for investing in the market. So if you've got some money to invest, you can choose real estate or equities, and at >1% the RE is pretty likely to out perform average stock market returns on cash flow alone. At less than 1%, you're pretty likely to be relying on appreciation to beat average market returns.

I will most likely transition into buying apartments in the next 5-10 years. For me personally, the 1% rule has much more application for apartments.

Simply because finding 1% rule SFH is difficult, or for some other reason? It seems to me that if 1% is desirable for apartments, it would be desirable for any RE investment.

I don't understand the idea of having control over rent, but not appreciation. Could you provide an example? I actually experienced the opposite this past year with my Kauai rental. I made some improvements, which increased the value of the house. However, I was not allowed to increase the rent on current tenants. I could have sold at any time. However, I couldn't legally raise the rent.

So to me, "sweat equity" does not really equate to appreciation unless your timeline is very short. You made improvements that have increased the value somewhat, but those improvements required additional time, money and effort from you. The property probably appreciated on it's own quite a bit during the same time simply because the housing market as a whole has been on a tear. It's easy to say "My house is worth $50k more now because I remodeled the kitchen", but that remodel took time, money and energy from you, and while that was occurring the house probably appreciated a good bit of that $50k simply because that's the trend of the general housing market.

The control I was referring to was the ability to have a pretty good idea in advance what your minimum return on an investment might be. I can run numbers on a property before investing anything to get a rough idea of what my return might be. Then, if any appreciation occurs on top of that it's just gravy. So if I find a property that's 1.5% (after building a time machine and traveling back to 2010) I can know that the property has the potential to return maybe 10% on the cash flow alone. That's 3% better than average market returns, which may be enough to tempt me into dealing with all of the expense and hassles of owning RE. Or maybe not, but at least I can have an idea. You can't really "run the numbers" on a stock to know what your return might be. That's an advantage for RE as an asset class. Easy leverage is obviously a big help too, but that cuts both ways as many tend to find out when the economy tanks.

I agree that have 1.1 million of real estate debt and 85K/year of income is not typical. However, just because it's not typical doesn't mean it's risky. To assess risk, at a minimum you need add in cash reserves, equity position and savings rate.

Risk is risk to me. If you view risk simply as an outcome where the investor gets burned, then of course buffers in place can help to mitigate that. I view risk as the odds of an investment succeeding or failing (relative to other potential investments). And that risk doesn't change regardless of the investor's other assets. If an investment has a 10% chance of failure, or a 60% chance of underperforming another option, then the amount of cash reserves, equity position and savings rate  of the investor really don't change that. They'd just make it more or less difficult to swallow the sub-optimal investment performance. You're may be reducing the impact of a truly bad outcome, but you're not able to change the odds of that occurring really. I'd bet that properties that meet the 1% rule have a lower risk of having negative outcomes or be outperformed by something like an index fund vs properties that don't meet the 1% rule.

[clarkfan1979]

1.1 million in debt with 85k/year of income is the definition of risky. You have an extremely risky investment strategy. Again, it's been working for you, but it's very risky.

Just cause you have cash reserves doesn't make a certain investment any less risky. It just means you bought a risky investment, but you can bail yourself out if needed. You can't say I bought a shitload of bitcoin, but it's not risky because you have plenty of reserves. Come on man.

EDIT: and to be transparent....I do very similar investments to you, but I don't tell others it's wise or that I was smart. I'm simply lucky as well. I acknowledge that I am playing with fire.

Also, I never said I had one rental. I have 5 rental units plus my SFH. I will have 7 rental units within the year once it's completed.

Did you delete your comment about my lack of understanding of the 1% rule? I thought I read that, but now it's gone.

Perception of risk is very subjective. I studied it in grad school (Prospect Theory). I was wondering what you specifically consider to be risky.

I must have misread or confused you with someone else on the thread that only had one rental. Do you care to share any of your numbers or any niche that you have? It seems like I'm the only one that shares my numbers. It's not bragging. It's sharing for others to use as a baseline.