Austin property - nothing meets the one percent rule

[clarkfan1979]

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.

This seems reasonable. No real disagreements here.

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.

Appreciation for apartments is more highly correlated with rents than for SFH

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 get what you are saying, but your argument isn't convincing that you can control the rent, but not the appreciation.

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.

I really like this analysis. You clearly defined your personal definition of risk and supported it with good examples. Based on your personal definition, I would have to agree with you.

I have a slightly different perception of risk within real estate. I do protect my downside with cash reserves. Within my circle of landlord friends, having more cash reserves is a fairly common strategy to reduce risk. I didn't fully understand the bitcoin analogy. It's pretty hard for me to make an apples to apples comparison with real estate and bitcoin. 

I would like to provide an example and ask for you perception of risk.

For my Fort Myers rental (33967), the neighborhood experienced a 60% correction during the 2008 to 2012 housing bust. Houses that sold for 250K in 2006, sold for 100K in 2010. I bought my house for 95K in 2012. Florida has a history of boom and bust, mostly because of their building regulations. They can move very fast and sometimes they build too much.

For my Fort Collins rental (80526), I don't think there was any housing correction in price at all. I bought in May 2007 for 182K. I think the median house price at the time was around 210K. If I put 10K into the house, I thought it should be worth 210K. When I go to zillow, it says that the median house price in August 2011 was 225K. It doesn't go past August 2011. I remember things being slow, but there was no actual correction downward in price in my neighborhood.   

Fort Collins: 425K value and $2450 rent. Taxes are $2520/year and insurance is $950/year. 0% vacancy over 14 years. Original loan balance was $261,500 at 3.5%. Current balance is 255,000.

Fort Myers: 300K value and $1950 rent. Taxes are $2650/year and insurance is $1344/year. 1 day of vacancy over 6 years. Original loan was $187,500 at 4.875%. Current loan balance is $182,000. 

In your opinion, which one carries more risk. I don't think there is a right or wrong. I think it's a personal judgment.

[clarkfan1979]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-kotlikoff/


This is a good example demonstrating that different people and different fields of study have different perceptions of "risk". Paula interviews an Economics Professor from Boston University. His first point regarding inflation is pretty good. However, after that, the interview takes a very weird turn. I am going to try to digest it and give myself a few days.

Going back to the previous discussion, I am being told that if I raise my income it will reduce my risk. However, if I raise my cash reserves, it will not reduce my risk. I'm having a hard time with that one. However, I will give it a few days to digest.

[Jon Bon]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-kotlikoff/


This is a good example demonstrating that different people and different fields of study have different perceptions of "risk". Paula interviews an Economics Professor from Boston University. His first point regarding inflation is pretty good. However, after that, the interview takes a very weird turn. I am going to try to digest it and give myself a few days.

Going back to the previous discussion, I am being told that if I raise my income it will reduce my risk. However, if I raise my cash reserves, it will not reduce my risk. I'm having a hard time with that one. However, I will give it a few days to digest.

He is saying your debt to income ratio is bad. Its not about perceptions or some philosophical discussion. It is just math.

Furthermore you don't realize any/much profit on your rentals. Realized profit (aka something you pay tax on) is basically the thesis of our entire argument. Rentals need to realize profit to be worth owning. Anything else is just guessing and luck.

I mean we can agree to disagree and all. I just think yes you have a perfect blueprint to build wealth in the years 2010-2020. However your strategy is in no way repeatable unless you have a time machine.

[PMJL34]

Clark,

Jon Bon and Paper chaser both said it better than I could. And yes, I deleted a portion of my comment. My apologies, it was uncalled for.

I still maintain that you are giving "flat out bad" advice to people looking to get into real estate. Your approach (and mine) of taking on extremely high debt with low income and well below 1% rule rents only worked because of luck and bull market. It's not actionable to others. In fact, I would never suggest others to try to do what I did. We both could have just as easily been here discussing bankruptcy attorneys. Like I said, I know what risk is and I took it. It worked out, you on the other hand keep claiming that risk is some philosophical construct that can be argued with textbooks and that you were somehow smarter than the average joe.

[clarkfan1979]

https://affordanything.com/329-challenging-your-confirmation-bias-with-economist-larry-kotlikoff/


This is a good example demonstrating that different people and different fields of study have different perceptions of "risk". Paula interviews an Economics Professor from Boston University. His first point regarding inflation is pretty good. However, after that, the interview takes a very weird turn. I am going to try to digest it and give myself a few days.

Going back to the previous discussion, I am being told that if I raise my income it will reduce my risk. However, if I raise my cash reserves, it will not reduce my risk. I'm having a hard time with that one. However, I will give it a few days to digest.

He is saying your debt to income ratio is bad. Its not about perceptions or some philosophical discussion. It is just math.

Furthermore you don't realize any/much profit on your rentals. Realized profit (aka something you pay tax on) is basically the thesis of our entire argument. Rentals need to realize profit to be worth owning. Anything else is just guessing and luck.

I mean we can agree to disagree and all. I just think yes you have a perfect blueprint to build wealth in the years 2010-2020. However your strategy is in no way repeatable unless you have a time machine.

Ok, let's stick with math and calculate our debt to income ratio. Enough of the theoretical bullshit. 

If you use the conservative formula from Fannie Mae/Freddie Mac, rental income is based off of 75% of the rent and then minus the mortgage. Total rents are $9,250/month. Then 75% of that is $6938/month. Total mortgages are $5691/month. Rental income is $1247/month. W-2 income is $5350/month for a total of $6597/month of income. We have two debts. Our primary house is $1196/month and student loan is $160/month for a total of $1356/month. Our debt to income is 20.5%.

Any mortgage brokers out there want to verify this calculation?

[clarkfan1979]

Clark,

Jon Bon and Paper chaser both said it better than I could. And yes, I deleted a portion of my comment. My apologies, it was uncalled for.

I still maintain that you are giving "flat out bad" advice to people looking to get into real estate. Your approach (and mine) of taking on extremely high debt with low income and well below 1% rule rents only worked because of luck and bull market. It's not actionable to others. In fact, I would never suggest others to try to do what I did. We both could have just as easily been here discussing bankruptcy attorneys. Like I said, I know what risk is and I took it. It worked out, you on the other hand keep claiming that risk is some philosophical construct that can be argued with textbooks and that you were somehow smarter than the average joe.

But other than this, I still like you man and enjoy your discussions/thoughts/contributions. Like I said we are pretty similar. Since you asked, my total real estate debt is 1.4 million with a value of 2.7mil. I'm a social worker and have never made 100K from W2. My current gross rent is a bit over 10K. Here in the bay area, rent control reigns supreme so I inherited several under market tenants. Market rent would be around 14k. Some units I keep below market for personal reasons. I'm adding 2 ADUs as we speak and that will bring in 2K a pop. I build everything with my own hands foundation up. I live in the SFH and my rentals are behind me and this is also a part of the 1.4debt/2.7value. I plan to quit my W2 once my rents are 5K net (including my home). Hope this gives you a sense of my situation.

One more thing. What all of this doesn't convey is the hours and hours and hours of hard work we put in to make all of this possible. Without you doing your own repairs and management, your portfolio will certainly look very different. Also, in order to get to where I am, I had roommates (maybe you did too). There were also days where it was stressful as fuck when I'm trying to obtain financing or refinance or whatever because our debt to income ratios are very high lol. I'm trying to give readers realistic expectations, not some fluffy advice like, "take out million dollars worth of loans with low income and you will be rich in 10 years! It works every time!" Let's be honest, we bought some ugly homes and worked countless days and nights bringing it up to par. Even through all of this, I know that this could have ended very badly for me because I was playing with fire. We (and others on here) also do a lot of things that other "normal" people just won't do to get here.           

Thank you for sharing your numbers. I think the readers will get value from them. Don't you think it's a little weird that your advice is to "do as I say, not as I do"?

I didn't take offense to your comment regarding the 1% rule. I just think you are wrong. You keep on saying that the 1% rule includes property taxes and insurance. I keep on saying that it doesn't. Do you still think the 1% rule includes property taxes and insurance?

I'm trying to provide useful information for the benefit of others. I agree that at face value my advice might not seem repeatable. This is mostly because I am not going to create a manual and tell students to follow my 7 step guide blindly. That part of the 1% rule scares me. I am trying to help people develop critical thinking skills that they can apply to real estate in their own way. Every investor and every market has some sort of niche.

I don't think I'm a genius. I have landlord friends that do much better than me. Do I think I am better than the average joe real estate investor? Yes, I do. I would put myself in the upper 50%. Do I know everything? No. Do I have more to learn and room to grow? Yes. Do I think it's possible to educate yourself and get better? Yes, I do. 

I agree that the United States experienced real estate appreciation over the years. Let's look at the median appreciation and I will compare each property with the median. I'm not exactly sure where to pull the best data. This is the website that I found.

https://fred.stlouisfed.org/series/ASPUS

Fort Collins: 192K in 2007 to 425K today (5.84%/year). National average was 310K to 434K (2.43%/year)

Fort Myers: 111K in 2012 to 300K today (11.68%/year). National average was 278K to 434K (5.08%/year)

Koloa: 660K in 2018 to 975K today (13.9%/year). National average was 378K to 434K (4.72%/year).

Pueblo West: 280K in 2019 to 350K today (11.8%/year). National average was 384K to 434K (6.3%/year).

If calculate a weighted average, I get 9%/year appreciation for my rentals and 3.8%/year appreciation for the national average.

I don't think I am as skilled as you, so I think I hire more stuff out. My current skill set is demo, flooring, painting, minor framing and minor plumbing. For minor framing, I once installed a non-load bearing wall to create a 4th bedroom. I hung the drywall but I paid someone to texture it. I paid an electrician to run electricity through the wall. For minor plumbing, I can change out kitchen faucets, garbage disposals and toilets. For appliances, I pay the installation fee.

I do mostly cosmetic rehab. For anything else, I hire it out. It seems like you are building houses from the ground up with your own hands. That's very impressive. I am hoping to gain more skills over the next 5 years, so I can take on a more primary role in building a mountain retreat.

My first rehab was 10K. My second was 10K + 6K for A/C. The Hawaii rehab was 50K. I ripped the basement unit down to the studs. It cost 50K because I hired out 75% of the work. For my current house, it required zero work. A contractor flipped it and it was turn key.

Thanks again for sharing your numbers. We are similar that we both have low incomes. I like your story. I think you will do just fine. However, you seem to be maxed out on your income and time. I agree with you that your position carries risk. My wife and I could easily add 100K/year of income by taking on regular full-time jobs that are realistic, but undesirable for us. Because of this, I would consider our position to be lower risk than it appears at face value. 

[PMJL34]

Clark,

I give up. Between arrogance and ignorance, I'm leaning towards you being right in the middle of the spectrum. You clearly are sugar coating a lot of things.

EDITED:

1. My understanding of DTI is:
Your stated total debt (rental mortgages, taxes, insurnace) $5691/m+ (student loans, which I have a feeling are not full payments, but something like pay as you go or whatever) $160/m + (primary) 1196 = $7047
Your stated total income = 12,288/m (W2 which is assume is pre-tax+75% of rental income)

7407/12288 = 60%  Debt to income ratio.

I could be off, but either way it's wayyyyyy higher than mine and above any lending standard. You cannot buy another house bro. You are tapped out. You basically are responsible for carrying costs of $7047/month before all of your living expenses (groceries, utilities, cars, clothes, phones, vacancies, repairs, whatever). Wake up Clark! This is textbook (fannie mae) definition of over leverage.

2. Appreciation: Compare your rentals to the city they are in. I bet you they are exactly on par with other homes in the area. Yeah, if I compare my bay area rental appreciation to "national average," I look like a genius too.

3. Here you are sugar coating again. Like maintaining and managing these rentals were a breeze.

I'm finished.     

[Paper Chaser]

Ok, let's stick with math and calculate our debt to income ratio. Enough of the theoretical bullshit. 

If you use the conservative formula from Fannie Mae/Freddie Mac, rental income is based off of 75% of the rent and then minus the mortgage. Total rents are $9,250/month. Then 75% of that is $6938/month. Total mortgages are $5691/month. Rental income is $1247/month. W-2 income is $5350/month for a total of $6597/month of income. We have two debts. Our primary house is $1196/month and student loan is $160/month for a total of $1356/month. Our debt to income is 20.5%.

Any mortgage brokers out there want to verify this calculation?

I'm no mortgage broker, but it seems like you're counting some amount of rental income ($1247/mo) in your numbers but not including any of the rental debt to get that 20%. I'm not sure if that's kosher. I'd think that you'd have to plan for the unimaginable worst-case scenario where all of your rentals had no rent at the same time, and you'd be responsible for covering the debt of all of the properties simultaneously. I'd simplify it like this:
$5691 investment property mortgages + $1196 primary mortgage + $160 student loan = $7047/mo debt
$9250 rents + $5350 W2 income = $14600/mo income
Monthly debt / monthly income = Debt to income ratio, so 7047/14600 = 48% DTI

Now I'm assuming that all of the mortgage payments include taxes and insurance which apparently don't count toward your DTI from a broker's perspective, but I'm a "plan for the worst/hope for the best" type of person so that's where my natural tendency leans. 50% is usually the highest allowed DTI for fannie/freddie stuff as far as I know and you're not too far off of that. I'm sure it's unlikely that the unimaginable happens and you'd be on the hook for all of your properties at the same time, but the debt is just a lot higher than I'd personally be comfortable with. (In the name of transparency I don't currently own a rental, and using the same method as above my DTI is under 9% to give you an idea of where I'm most comfortable).

[PMJL34]

 Yes, I agree, my "position carries risk" a lot of it I might add....so what does that make you??? How is it that you see my risk, but not your own?

OMG Clark, you are killing me.

[clarkfan1979]

Clark,

I give up. Between arrogance and ignorance, I'm leaning towards you being right in the middle of the spectrum. You clearly are sugar coating a lot of things.

EDITED:

1. My understanding of DTI is:
Your stated total debt (rental mortgages, taxes, insurnace) $5691/m+ (student loans, which I have a feeling are not full payments, but something like pay as you go or whatever) $160/m + (primary) 1196 = $7047
Your stated total income = 12,288/m (W2 which is assume is pre-tax+75% of rental income)

7407/12288 = 60%  Debt to income ratio.

I could be off, but either way it's wayyyyyy higher than mine and above any lending standard. You cannot buy another house bro. You are tapped out. You basically are responsible for carrying costs of $7047/month before all of your living expenses (groceries, utilities, cars, clothes, phones, vacancies, repairs, whatever). Wake up Clark! This is textbook (fannie mae) definition of over leverage.

2. Appreciation: Compare your rentals to the city they are in. I bet you they are exactly on par with other homes in the area. Yeah, if I compare my bay area rental appreciation to "national average," I look like a genius too.

3. Here you are sugar coating again. Like maintaining and managing these rentals were a breeze. IIRC, you are the one who needed your wife to work at Target because you were financially in trouble. You were the one who vacations to Hawaii, but had to spend significant time on the house (repairs). You were the one who took 7 trips to costco to pick up flooring and spent another 7 days or whatever in a rental that was occupied by tenants doing 2000+sq ft of flooring while they lived there. Just last month, it was a 10K and multiple visits to a water issue right? You didn't sound so pleased about it. And this is only what you have shared. I wouldn't be surprised if your numbers were worse. You also do a quiet a bit of "in 3-4 moths, my payments will go down $300/m" through a refi that hasn't even started yet. And here's the kicker, "My wife and I can earn another 100K in W2" WTF?? You are already employed full time. Last time your wife went to work, she was at Target. I'd wager neither of you have ever made 100K. You yourself stated you have been at 85K for the past decade. Be honest with yourself and to others. I hate sugar coating.

I'm finished.     

1. You keep on saying that the 1% rule includes taxes and insurance. You deleted your comments and won't address the issue.

2. You are not calculating debt to income correctly due to Freddie Mac rules.

You have now blasted me on two things that you are dead wrong.

3. If you want, I can compare my neighborhood to surrounding neighborhoods. I could also maybe compare it to the county average. You bought in one area. I bought in 4 different regions of the country. I like your area. No criticisms. However, your "thesis" of luck is would be more consistent with your portfolio than mine. It's much more difficult to get lucky 4 times than 1 time. 

Off the top of my head, for the Fort Collins rental, there are 4 sections. North, East, West and South. Based on my analysis the north neighborhood was the best, but I couldn't afford it at the time. As a result, I went with the second best option (west). I'm 95% confident that the north neighborhood has been the best and the west neighborhood has been #2. Not the best, but better than average.

For the Fort Myers rental, I bought in 33967. I killed it. #1 the whole way.

For Kauai, there are 5 neighborhoods. I was only looking in 3 neighborhoods because they were within 30 minutes of work. The Koloa neighborhood has been #1 out of the 3 choices. I think it's been #2 out of the 5. Princeville on the north shore is #1. However, that would be a 1 hr and 15 minute drive for me, so I wasn't really considering it.

For Pueblo, I have only lived here for 2 years. I probably don't know the neighborhoods to compare. The only comparison that would make sense to me is my house vs. the county average. Since November 2019, the county average has been 29% and my house has been 25%. As a result, when comparing neighborhoods, I'm slightly lower than the county average. So maybe you got me there?

However, according to the website with national data that I shared previously, it's been 13%. If you read newspapers, you are probably seeing 20% year over year from June 2020 to June 2021. That's because real estate went down in May-July 2020 due to COVID-19 and it's been pumping ever since. As a result, I think 13% since November 2019 is correct for national average.   


4.  My wife left  her full-time job in 2015 and was making 65K.  She now makes 12K. If she ever wanted to go back to  full-time work, she cold be making 50K in 3 months and 70K in two years.  I now make 54K.  I was offered a job in  2015 with starting pay of 120K at
 a non-profit. I turned it down because it was only 4 weeks of vacation.

5.  Repairs:  The flooring was fun. I loved it. I did it over winter break and summer break. Don't you love the feeling of ripping out old carpet and replacing it with new laminate? It looks freaking awesome.

The septic field repair was stressful. I did zero work, but it was stressful because I have had many septic companies in the past lie to me. I was not stressed about  the money at any point. That is why I have cash reserves. The 3 trips were booked in advance.  I went to the house once. I didn't even go to the house on the other two trips.
 
 
  6.  I work 1,000  hours /year at my w2 job. Do you really only work 1,000 hours as a therapist?  If  so, you can probably see more clients for more money.  Don't know much about it. I have one therapist friend that gets paid based on the number of clients.

edit: I had some time to add to the post and address some of your other concerns

7. My student loan balance is $24,000. Approximately $13,000 is at 2.07% and $11,000 is at 6.55%. I signed up for the 25-year graduated extended plan, which is now $160/month. I wanted the lowest payment possible because I can make a higher return in the stock market and real estate. That has been my experience over the past 10 years.

8. I emailed my mortgage broker 2 days ago that I am ready to refinance starting August 10th. I waited until August 1 because the government is removing the .5% fee for refinances starting August 1st. I'm going to Boise, ID August 4-9 for vacation. My friend from college has a wakeboarding boat. We are doing 3 days of wakeboarding, one day of floating river and one day for the standing wave river surf thing. It's going to be awesome. Very excited. Never been to Boise.

9. If you don't believe my numbers that is fine. I don't have anything to prove. Being able to tell when someone is full of crap is a very useful skill. I believe that you have 350K in cash reserves. However, it would be my best guess that the majority of this money is already dedicated to construction costs for your two new builds that you were talking about. Am I close?

I will admit to sugar coating, although un-intentional., l do it in all aspects of my life. I'm a glass half -full type of guy. That is why you like me so much. The next time I am in the bay area we will grab some beers.

[PMJL34]

I appreciate you admitting that you are over leveraged and run a very risky real estate portfolio. I also appreciate you admitting that the 1% rule is very valuable and that appreciation is speculation :) lol

I think we've run the course here Clark! lol

I could be wrong, but I feel confident in how I calculated your DTI. You are definitely 50%-60%+ territory lol. Your broker will know your DTI on Aug 10th it sounds like. Don't worry, I'm right behind you.

I'm happy to grab a beer/bite with you anytime. Your Boise trip sounds like a blast!

Cheers!

[ColoradoTribe]

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.

I’m with Clarke on this one. I’ve bought rentals (2) here in Colorado in 2017 and 2019. Both were in the neighborhood of 0.55-0.58%. There are no 1% deals near me. I like crunching the numbers though and its worthwhile as a benchmark. I ignore anything under 0.5% and strive for 0.6%. Both my rentals cash flow and I wouldn’t buy any place that wasn’t at least comfortably cash flowing. However, in HCOL areas I think its absolutely reasonable to invest with some expectation of long-term appreciation. I disagree that there is not a skill set involved or that it is simple “luck” or straight speculation to factor appreciation. I was very deliberate, and bought properties that were in established, older neighborhoods where no new housing could be added nearby. Places that were in easy walking distance to amenities like restaurants, bars, open space. Places near public transportation. Locations that are easy commutes to multiple work destinations with jobs in diversified sectors. I also know the population of Colorado is expected to double in the next 30 years. People will continue to move here as long as Colorado offers a good quality of life and cheaper housing prices than places like SF, CHI, NY, etc.

Future rent and therefore cash flows are no more guaranteed than appreciation. But savvy investors can tilt the odds in their favor by looking at the property holistically and not just a snap shot of the cash flow numbers. I’m averaging ~12% annual return across all years for both properties (cash flow + appreciation). I get quality tenants and my vacancy rate is close to zero. Home prices in this area did not tank in 2008. Maybe a 5%-10% drop and a quick recovery. Doesn’t mean there couldn’t be a crash here, but the market passed a major stress test and scarcity is built in due to strict progressive zoning laws and towns that are at or approaching 100% build out.

[clarkfan1979]

I appreciate you admitting that you are over leveraged and run a very risky real estate portfolio. I also appreciate you admitting that the 1% rule is very valuable and that appreciation is speculation :) lol

I think we've run the course here Clark! lol

My 350K+ is just brokerage, IRA's, and 401k. I cashflow my builds. They won't cost much. Maybe 20K each. I work 4 days/week and work about 5-8 hours/day plus generous vacations and personal time so it ends up being a little bit more than you, but not by much.

I could be wrong, but I feel confident in how I calculated your DTI. You are definitely 50%-60%+ territory lol. Your broker will know your DTI on Aug 10th it sounds like. Don't worry, I'm right behind you.

I'm happy to grab a beer/bite with you anytime. Your Boise trip sounds like a blast!

Cheers!

I respect your hustle and grit. That was me in grad school.

While my current job is awesome, it took 7 years of full-time grad school to get my current job. It also took another years 4 part-time to get my advisor to sign-off on my dissertation. The first 2 years were very fun and stress free. After that, grad school became very stressful because I began to realize that my advisor had very little interest in me actually graduating. In the end, it's on me. It was my decision to select her as an advisor and it was a poor decision. She had a long track record of graduating less than 50% of her students. I missed it. I was naive. If I ever sugar coat grad school, I deserve a face punch.

Would you be willing to share your experience with rent control? Anything that you are willing to share I think would be valuable.

I heard that there were quite a few people that left San Francisco during COVID-19 and rents went down like 20%. However, if those tenants were rent control tenants paying 28% lower than market value, a landlord could end up net positive.

Are rents back to pre-COVID-19 levels or are they still down? Was the correction actually 20%? That seems kind of high to me. My source was a real estate podcast and the landlord owned like 3-4 units in San Francisco.   

[lampstache]

Look up Joe Asamoah. He's on several podcasts talking about his Section 8 investing strategy in a very high priced market (Washington DC). Could be something to consider.

[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.

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.

Never been a fan of tulips, I'm more of a Beanie Baby kind of guy.

But answer this, when you get your monthly statements, you look at the balance right?  yea, you want to see it going up just as much as the rest of us do..

And for my properties, I buy them for 3 reasons, 1, cashflow.  I have a number of rentals that provide me this but no where near the 1% rule.   With rates in the low 3's I can get away with a .7 or so.   2. appreciation, I have a few rentals with crappy rent to value but the values have been increasing much faster than rents, so I'm in no rush to punt them. 3, I do live in flips (and an occasional flip), so if I update a kitchen/bathroom I sure as heck expect the value to be worth much more than I paid for it.

I have to add, every property I've purchased needed work, I look for under priced properties, fix them to get a higher rent and/or sell it.  Almost all of the properties I've purchased were off market deals. Not having to bid against the public or paying relator fees adds up.   Which should allow you to make money in real estate, and hopefully beat the stock market..  Cause i'll be mighty disappointed with myself if I could of gotten here with just the VTSAX.

So in response to OP's question about making money in Austin when the 1% rule is so out of wack.  They can buy a property that needs work and fix it.  Then decide what to do with it. Sell it? sure.   If they can get cash flow it well enough and end up holding it for 20 years, things should turn out just fine for them. 

[PMJL34]

Clark (and others),

SF, SJ, and Oakland luxury/high rise apartments got hit the hardest. 20% or more in rent reduction, several months free, and other creative rent reduction techniques were used and they still experienced high vacancies. They still have not recovered. Apartments in bay area got hit hard too. SFH's and duplexes did fine. Keep in mind, SF at its high was $3500 for a 1bedroom. Prices needed to come down either way imo.

In my area, rents went down 10% or so, maybe more, mostly because the local university went fully distance learning. Rents have recovered, but we are still below pre-COVID rents. Keep in mind even 10% is big here because average rent for 3 bedroom is about 4000-5000, so a 10% reduction in rent is  3600-4500 and then you are locked into that rent forever until the tenant decides to move (most SFH's are exempt from rent control, but any multi is rent controlled for the most part). And most likely the tenant won't move because they got the COVID special rent locked in and won't be able to find a comparable price ever again. So owners who took price cuts will have to live with it for the foreseeable future. Rent increases are capped by the city at around 0-2% per year. 2020 was 1%. We also can't evict yet (memorandum in place). Tenants have one year following missed rent to pay. So if tenant misses August 2021, you can't file for eviction until Aug 2022. No late fee or penalties can be added either. Even if we could evict, you can only evict for reasons like breaking the lease or non payment of rent. We can't evict because lease runs out. We can't just give notice and ask them to leave, ever.

The below market rate tenants we have here aren't like the rest of America. Examples are like tenants paying $600 for a 2 bedroom. If tenants were smart, they just never moved from their original lease in 1995. They can't be evicted unless they choose to move out. Owner occupy after purchasing a home is no guarantee either (because it's essentially an eviction) and you need to pay for relocation costs which are minimum 15K (much much higher if they have been there longer and if they are older, disabled, children, etc.). Cash for keys for in law units are regularly 6 figures, SFHs are higher. These folks never left and never will. I mean why would they?

This is the gist of bay area rentals. Pretty much every investor doesn't care because of appreciation potential. They buy with these homes with below market renters with no issues and just sell the property after 5 years because the price doubled. I also recall a home not far from me sold for 1 million dollar around in 2020. It was advertised as non paying renter with no recourse. The tenants are still there. The new owner just pays the carrying costs with $0 rent and will most likely try to resell in 2 years for 20% increase in price.

On the positive side, as mentioned, you get insane amounts of rent per unit and unparalled appreciation. The entry prices for apartments are about: 1 bed is 2-2.5K, 2 bed is 3k-3.5, 3 bed is 4-5K. 3/2 SFHs rents are about 6K-8k when fixed up. Not many 4 or 5 bed housing. If they are, they are rented to students with 1000-1500/double room (aka 2000-3000/per bedroom) lol sometimes they do triple rooms at 1k as well. median price in Berkeley was highest in the nation a few years back. Not sure about now, but it's very expensive. Desireable homes still sell for 1mil over asking. Here's an example for laughs list price 1.15 sale price 2.3:

https://www.redfin.com/CA/Berkeley/6-Harvard-Cir-94708/home/692595

https://www.sfgate.com/realestate/article/berkeley-home-sells-for-1-million-over-asking-16067210.php

[Jon Bon]

I've said it before. Southern Cali should have its own thread! All RE is local of course, and some of the legal/tax issues there just make it expensive/difficult/confusing etc.

I would also say the same about Hawaii, a pretty specific market. However if we are talking about the other 48.5 states I think the 1% is still a good guideline.

Hey OP, just don't be the greater fool and I think you will do just fine!

[srad]

Its not just Cali, NY isn't much better... 

I know a guy paying $697.52 for rent right in the heart of the Upper west side.  Value of his 2 bedroom flat is well over 2 million. I'd be surprised if you could find a unit of any size in his building renting for less than 5k.  He's over 70 so you cant ask him to leave, ever.  he's lived there with his son for like 40 years. If he passes away and his son has hit that magical number (I'm not sure where the cutoff is but its around 70), his son can't get asked to leave and continues to  pay the 697.52 till he passes away. There is a minimal amount like 1% you can increase rent, but it will take a thousand years to get that place to market rate. 

Best part, HOA alone is 2100 a month.  Taxes are 20k a year,  No wonder previous owner lost this in Foreclosure.  Bank is now sitting on this for perpetuity, Paying those taxes and HOA, no one will buy it. 

Largest CFK I've seen offered too - 400k,  He'd be an idiot to take it.  Maybe on his death bed he'll take it only if his son doesn't want to live in NYC anymore?

[Jon Bon]

Yeah I was gonna say NYC as well. Anything hyper local with politicians/NIMBYs think they can solve the worlds ills by just regulating more.

I think I read somewhere the economists can never agree on anything. Except they all could agree that rent control was stupid!

https://www.washingtonpost.com/opinions/2019/06/15/comeback-rent-control-just-time-make-housing-shortages-worse/