Author Topic: Examining the 1% Rule  (Read 2560 times)

PMJL34

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Examining the 1% Rule
« on: December 13, 2020, 10:53:54 AM »
Hello folks,

I wanted to examine the 1% rule for a buy and hold investor. We all know the benefits and disadvantages of rentals so I won't go into that. I am strictly looking at the dollars and cents. Let's take a look at someone who lives in an expensive city and wants to invest in an out of state rental that meets the 1% rule.

Assumptions:
Purchase price 100k. 1000/month rent. Rent goes up with inflation (2%/year), but so does the everything else (property tax/material and labor costs/insurance). So for simplicity, I'll just keep everything in today's dollars.
Down payment of 20k closing costs 5k = 25K
Every property purchased is going to cost money to get it up and running just for new paint and floors and etc. especially a 1% home that costs 100k  = 10K (this can even include the management fee to secure first tenant which is usually first month's full rent)
PITI @3% = 337/month for 30 years = 121k
Property tax 1500/year
Insurnace 700/year 
Management 125/m = 1500/year

Items every 30 years
Roof 10k
Kitchen 15k
Bathroom 10k
Bathroom 10k
Hvac 10k
Paint 15k (exterior every 15 years 4k)x2 = 8k plus all of the painting interior for 30 years of 7k =15k
Appliances (dishwasher (400)/fridge (600)/oven (500)/washer (500)/dryer (500) replacement every 15 years) $2500 x 2 = 5k
Hot water heater every 10-15yrs let's say 1k per = 3k
Random house calls for clogs, broken items, patch up holes, gutter clean up, filter replacements, rodents control, deck maintenance, daily maintenance and upkeep  etc. 1k/ year = 30k
Vacancy every 3 years for one month is 10 months over 30 years = 10k
One shitty renter every 30 years that costs you extra 3k to get it cleaned up after they leave. Assume that every other renter you could get it move in ready with deposit =3k
**This doesn't include any major items like exterior siding replacement, major electrical/plumbing/gas updates, foundation issues, concrete driveway, window replacements, etc.

Total rent collected = 360k
Total cost put into home = 388k
Total net value is either break even or negative over 30 years + house value of 180K  (assuming 2% increase/year)

Comparing apples to oranges
Stock market 35k initial investment compounded over 30 years at 7% is 266k
so 266-35k initial = 230k profit without lifting a finger

I feel like this is semi-realistic assessment of a rental property at 1%. For this reason, I don't recommend out of state properties even at 1%. I would also argue that a more expensive home around 250K that could generate 2k of rent would be more profitable (350k at 3k or even 500k at 4k maybe even more profitable for a buy and hold investor) .

I do believe that one can make more money in real estate simply becuase one has more control and can leverage, but this takes time and knowledge, energy, and risk. For the average joe, I believe that stock is the better route.

What do you think?

EDIT: lol silly me added Principle and Interest.
« Last Edit: December 14, 2020, 10:30:39 AM by PMJL34 »

maizefolk

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Re: Examining the 1% Rule
« Reply #1 on: December 13, 2020, 01:07:25 PM »
I think you have to be careful about where you factor in inflation and where you don't.

For example the 7% return of the stock market is presumably coming from the 6.8% long term CAGR of the stock market with dividends reinvested and after inflation (before correcting for inflation the long term CAGR of the stock market is 9.1% which would have $35k growing to $477k over 30 years). So the $266k after 30 years is in today's dollars. But then you have the house having increased in value to $180k after 30 years based on its value increasing at the rate of inflation, so the $180k the house is worth measured 2050 dollars, which are worth about 55% as much as today's dollars. Putting everything back in today's dollars slices $80k off the return of the rental scenario. 

It's also a little unclear how you're handing the carrying cost of the mortgage for 30 years. What interest rate are you assuming? One big positive of leverage with real estate that you may be missing out on is that while your costs, rent, and the value of your home increase with inflation, the principal and interest payment of a long term fixed rate mortgage to done. So the last mortgage payment in 2050 will be an equal number of dollars as the first in 2020, but the last mortgage payment would only cost 55% as much in today's dollars as the first one. So factoring in the effect of inflation may make the rental scenario look more attractive.

waltworks

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Re: Examining the 1% Rule
« Reply #2 on: December 13, 2020, 03:36:48 PM »
Agreed with Maizeman that inflation needs to be consistent across the board here. I think the Schiller study said residential real estate appreciated about 1% over inflation in the 20th century, or something like that. You could debate that endlessly.

Your tax situation will have some bearing here too. Depreciation can cut your tax bill massively (albeit only until you sell), and if you plan to hand down properties to heirs, they won't have to pay back a cent of that money (or capital gains if they sell immediately) as the basis steps up. If that's not your plan, your depreciation cancels itself out as it's recaptured and you'll pay capital gains on selling the house, which will negate some of the appreciation.

Then again over a 30 year timeframe, tax law can change a lot.

I personally think of 1% rule houses as being sort of tied with the index funds when all the qualitative (work/worry/concentration of assets/risks of leverage) factors are considered. On purely quantitative measures, the 1% rental comes out ahead by a bit.

-W

PMJL34

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Re: Examining the 1% Rule
« Reply #3 on: December 13, 2020, 03:43:14 PM »
Maizefolk,

Thanks for the input. Silly me, I did the write up on a lazy Sunday morning and completely forgot PI. It's updated now at 3% and now the rental is net zero or even negative.

I agree that inflation is tricky to account for as it's freaking 30 years out. My intent was not to make this real estate vs stocks, but show readers that even with a 1% home, the margins can be very slim. I do agree that inflation should work in favor of real estate all things considered.
 

PMJL34

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Re: Examining the 1% Rule
« Reply #4 on: December 13, 2020, 03:53:39 PM »
Waltworks,

Interesting thoughts. Again, not a debate about stocks vs. real estate, but I personally feel that stocks wins hands down vs a 100k rental (just like this case study). Even worse would be a 50K house. Unless you are a seasoned RE professional, lots of DIY, or leverage is used, stocks comes out ahead by a good margin. My reason for this post, was to show the true(ish) carrying costs of rentals over time. I'm seeing time and time again, posters not accounting long term costs and severely underestimating carrying costs overall. I'm curious as to how you think a 1% could come out ahead looking at this as an example.

As you have noted, you feel you may have left 100's of thousands on the table by selling early, but I'm guessing the proceeds went to stocks. In which case, they have equally bloomed, so I don't think you are really that negative, if at all.

Regarding tax implications, I would argue that OVERALL, the current tax codes are more friendly to real estate during your working years, but stocks are more friendly if you are FIRE (of course every person's circumstances are different). Most people will most likely sell in their later years (or FIRE years) and it's not very friendly then as you mentioned due to depreciation recapture. So the exit game is much harder for real estate compared to stocks.

Edit: Also prop 19 just passed in CA. It's a huge deal for me, because my plan was to hand down to my children. This most likely makes it so that they would need to sell right away. I would guess that other states will pass down similar laws in the near future due to increased housing costs.
« Last Edit: December 13, 2020, 03:59:19 PM by PMJL34 »

waltworks

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Re: Examining the 1% Rule
« Reply #5 on: December 13, 2020, 04:42:54 PM »
We're just in the overly optimistic rainbows and unicorns stage of this RE cycle. I expect to see lots more "The 1% rule is so dumb!" posts until the next crash. Which could be next year or 10 years from now, of course.

-W

maizefolk

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Re: Examining the 1% Rule
« Reply #6 on: December 13, 2020, 06:06:33 PM »
Silly me, I did the write up on a lazy Sunday morning and completely forgot PI. It's updated now at 3% and now the rental is net zero or even negative.

Ha! Well in the short term, not paying principal or interest is certainly one way to increase cash flow.

More seriously, could happen to any of us, that's why it's helpful to have multiple people looking at the numbers and assumptions, which is what posting here provides.

theoverlook

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Re: Examining the 1% Rule
« Reply #7 on: December 14, 2020, 08:21:04 AM »
Thanks for running the math. I'm sure some people would argue the maintenance costs you've compiled but they look reasonable to me. The long term carrying costs of a house are very high. I've run the same numbers bunches of times and compared to index funds most residential single family home rentals just don't stack up to me.

PMJL34

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Re: Examining the 1% Rule
« Reply #8 on: December 14, 2020, 10:39:04 AM »
Overlook,

I was actually expecting a lot more criticism with my numbers/assumptions from this forum. I felt that posters would defend the profitability of rentals, but maybe it's just too early.

In my scenario, even if you cut the vacancy, maintenance, and other numbers in half, you still don't come out significantly ahead.

This is just my personal word of caution against the cheap out of state homes that people tend to go for. I think the market appropriately prices houses in these LCOL houses and there's a reason why they are still for sale. Plan accordingly.




WGH

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Re: Examining the 1% Rule
« Reply #9 on: December 14, 2020, 02:15:53 PM »
Just my opinion as a novice but I fall back on the you make your money when you buy argument. My GF purchased one foreclosure for $105k added about $10k in improvements and is now renting it for $1650/month. So that's 1.4% but the house is also now worth closer to $175k. So yes not a 1% if she would have bought it at a normal price but because it was distressed she got better than 1% and created about $60k in equity. She just purchased another for $135k which we are thinking to flip instead as it almost 3k sq ft but will need maybe $40k-$50k in work and we project to sell around $250k-$265k. Renting it could maybe get $2k a month which is still better than 1% at what the cost was but it sits on .4 acres and the taxes will eat up too much.

Point is for me real estate is only worth it if you buy at a deep enough discount to create additional equity once you have fixed it up. To buy a turnkey property like in your example for $100k and rent for $1k a month just isn't worth it. I would put that $ in the stock market instead.

Just my .02.

PMJL34

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Re: Examining the 1% Rule
« Reply #10 on: December 14, 2020, 04:58:10 PM »
WGH,

You have a smart and savvy GF. I agree with everything you said.

Money is made in all investments when you buy. Unfortunately, people don't understand this and some folks purposely ignore because they "have a vision" or they are overly optimistic (thinking with their heart). It's a tough uphill battle when you overpay from the get go.

I too would keep the 105k home and flip the 135k home. Just maintaining the .4 acres is a lot of work. Not to mention the 3k sq space every time you need  re-paint (or even just clean)!

Again, I'm really surprised that everyone is in agreement. The forum as a whole preaches 1%, but when I semi crap on it, no one has anything negative to say. I guess it is what it is.  Maybe we need to update that 1% rule must include some sweat equity (or semi-flip) and self management?
« Last Edit: December 14, 2020, 05:00:32 PM by PMJL34 »

Paper Chaser

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Re: Examining the 1% Rule
« Reply #11 on: December 14, 2020, 05:18:02 PM »
I have not seen anybody here state that the 1% rule is a hard and fast guideline to follow blindly. It's often suggested to people with underperforming rentals as a litmus test, but it's really intended to be a quick, "back of the napkin" estimate to determine if a property might be worth running the numbers in more detail.

It's always been my understanding that the 1% rule really was just the minimum threshold to determine if a property might have any chance of beating historical market returns. So at 1%, you're probably about even with equities. Below 1% is probably a losing proposition without significant appreciation (which is obviously out of the owner's control). More than 1% means you might have a decent shot of beating average market returns, plus any appreciation. I think your estimates show all of this to be true, which is why you're not getting much disagreement that you anticipated. You basically just confirmed what most people here understand about the 1% rule already.

Paper Chaser

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Re: Examining the 1% Rule
« Reply #12 on: December 14, 2020, 05:44:21 PM »
One thing that would obviously throw your numbers off is the assumption that a house in a LCOL area might only appreciate at a rate equal to inflation. I live in a LCOL and depending on the source, my house has appreciated between 40-72% in the last 4 years. Of course as I said, such appreciation is unpredictable and out of the control of the owner. But housing prices and appreciation have climbed a ton, even in LCOL in the last 10 years.

waltworks

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Re: Examining the 1% Rule
« Reply #13 on: December 14, 2020, 05:55:36 PM »
Look, the last decade isn't normal. Buying a house for appreciation/to fix and flip has *nothing* to do with the 1% rule, and nobody would ever claim that.

The issue has gotten confused because appreciation has been so spectacular for the last 10 years that buying basically anything worked out, no matter what your original reason for purchasing, purchase price/rent, whether you fixed things up or ignored problems, etc. So we have people saying that you can spend $500 a year on maintenance and it's fine, and people saying you should go buy a million dollar vacation home because they did and now it's worth $1.3 million post-covid, and people who fixed up the bathroom a little and sold their house for $100k more than 4 years ago.

I rode that wave too, but I remember the previous housing boom too well to start talking about new paradigms and how the old rules don't apply anymore. That's what everyone said last time too. Sooner or later the music ends and we'll be back at looking for decent 1% rule properties in decent neighborhoods.

-W

vand

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Re: Examining the 1% Rule
« Reply #14 on: December 15, 2020, 07:43:55 AM »
With mortgage rates at 3% or lower, if you can't make a 12% gross yield work then it's definitely you... not them.

theoverlook

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Re: Examining the 1% Rule
« Reply #15 on: December 15, 2020, 10:19:24 AM »
With mortgage rates at 3% or lower, if you can't make a 12% gross yield work then it's definitely you... not them.
That's pretty comical. 12% gross with no consideration to costs and it's "definitely you?" Such wisdom.

PMJL34

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Re: Examining the 1% Rule
« Reply #16 on: December 15, 2020, 11:11:54 AM »
Paper chaser,

1)Appreciate the input. I was under the impression that if a rental met the 1%, it was a good purchase according to the members here. In that case, I am just preaching to the choir :)

2)Regardless of recent sales or zillow, would you feel comfortable saying that your rentals are appropriately valued at this moment? As Walt said, the recent appreciation is abnormal and I think most of us can agree the prices are highly inflated at the moment, mostly due to low interest rates.

Vand,

Are you able to find homes today, in this market that produce 12% gross yield? Or are you speaking about the past?



 

theoverlook

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Re: Examining the 1% Rule
« Reply #17 on: December 15, 2020, 01:19:21 PM »
I believe what vand means is that 1% of purchase price per month = 12% of purchase price per year gross.

norajean

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Re: Examining the 1% Rule
« Reply #18 on: December 15, 2020, 02:03:54 PM »
I'm not sure where people got the idea the 1% rule was about a comparison to alternative investments. It's not. It is a very basic rule of thumb (shortcut) to estimate if you will have positive cash flow on your property assuming typical costs for PITI and maintenance.  If a property meets the 1% rule on first blush, then it is time to really dig into the figures using realistic numbers for interest rates plus all other costs and revenues.  In the end it doesn't matter what percent it achieves as long as you are pleased with the short and long term cash flow relative to your initial investment (not the purchase price).  It that all looks good, then you can look at ROI including factors for depreciation and equity transfers.

All that said, maintenance costs are notoriously difficult to forecast (especially in the future!) and must be controlled.  Don't buy a place with potential high maintenance costs ahead. Don't rent in a fashion that increases your maintenance costs (e.g. high turnover means more painting and carpet).

I'm not sure 3700/year in maintenance is realistic for a 100K property - 3.7% sounds frightfully high. I might avoid such a property.

vand

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Re: Examining the 1% Rule
« Reply #19 on: December 16, 2020, 01:07:16 PM »
With mortgage rates at 3% or lower, if you can't make a 12% gross yield work then it's definitely you... not them.
That's pretty comical. 12% gross with no consideration to costs and it's "definitely you?" Such wisdom.

Unless your houses are made out of spit and chewing gum then maintenance costs aren't going to take up more than 1%-2%pa.
Some of the numbers in the OP's assumptions are pure fantasy.

PMJL34

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Re: Examining the 1% Rule
« Reply #20 on: December 16, 2020, 01:34:38 PM »
To Norah and Vand,

My maintenance assumptions were:

Items every 30 years
Roof 10k
Kitchen 15k
Bathroom 10k
Bathroom 10k
Hvac 10k
Paint 15k (exterior every 15 years 4k)x2 = 8k plus all of the painting interior for 30 years of 7k =15k
Appliances (dishwasher (400)/fridge (600)/oven (500)/washer (500)/dryer (500) replacement every 15 years) $2500 x 2 = 5k
Hot water heater every 10-15yrs let's say 1k per = 3k
Random house calls for clogs, broken items, patch up holes, gutter clean up, filter replacements, rodents control, deck maintenance, daily maintenance and upkeep  etc. 1k/ year = 30k

**This doesn't include any major items like exterior siding replacement, major electrical/plumbing/gas updates, foundation issues, concrete driveway, window replacements, etc.

The numbers total = 108000/30 years /12 months = $300/month

Which specific maintenance costs are high to you? I feel they are very average and even low in some aspects. please don't say DIY either.

also, what is 1-2%pa? per annual?

I have no idea why people take a % of the purchase price as the maintenance cost. a 3/2sfh at 50k home doesn't cost 500/year and 500,000 doesn't cost 5k/year. most of the home value, or lack of, is in the land cost. The structures are mostly similar.
« Last Edit: December 16, 2020, 01:37:45 PM by PMJL34 »

vand

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Re: Examining the 1% Rule
« Reply #21 on: December 17, 2020, 02:27:54 AM »
I'm not really interested in going over you numbers with a fine tooth comb TBH because anyone can make up whatever numbers they want and it depends on the type of property. Remember that you're kitting out a rental home, not a palace.

What I can categorically tell you is that many people who make Rentals work perfectly well with gross yields of 6%, even 5%.

I understand that costs are different in different countries, but if you can't make a 12% gross yield work then it definitely IS you, or the house is on the edge of a cliff or something.

A normal property should cost no more than 1%pa of its market price to maintain. Some cost less than that. My rental is in tip top shape and over the last 10 years I've paid an average of 0.3% of its market price to maintain year on year. I borrow at 2% against, and the management cost is about 0.5% a year. So I have positive cashflow on as little as 4% gross yield (I get a bit higher than that, but not much -  it's not the best rental investment ever but I keep it for other reasons also).


waltworks

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Re: Examining the 1% Rule
« Reply #22 on: December 17, 2020, 06:59:05 AM »
Vand, have you replaced any of the stuff that PMJL34 mentions? If not, do you ever anticipate doing so?

-W

vand

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Re: Examining the 1% Rule
« Reply #23 on: December 17, 2020, 07:22:12 AM »
Vand, have you replaced any of the stuff that PMJL34 mentions? If not, do you ever anticipate doing so?

-W

Well my rental is a newishly built flat in a moderate climate country. It's very different to having to maintain a detached house in the middle of the Arizona desert.

As I said I pay 0.5% of the market value in management fees, and from this they maintain the building and all the grounds. No big expenses have come up in that time.

Extra work I've had done:

Painted the interior twice, rough cost of $300 each time.
Replaced a dishwasher earlier this year $300
Made one-off security improvements $2000
Replaced a few double-glazing panes $300
Remodelled the bathroom twice $8000
Required electrical works $1500


So I've put about $13k into it to maintain it, which is about 2% of the current market value of the flat, or 0.3% annually. If you add the management fee that is 0.8% total maintenance cost.

I will grant that I have not costed my time which I have put into it, which is not inconsiderable.

theoverlook

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Re: Examining the 1% Rule
« Reply #24 on: December 17, 2020, 07:31:43 AM »
Assuming by "flat," you mean a unit in a shared building, then it would have completely different maintenance costs compared to a single family residence. Directly comparing the two is like comparing apples and sheet metal. I'm sure you pay a maintenance fee for the building - how much is that and what does adding it in (which is only fair!) make your mythical 0.3% into?

waltworks

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Re: Examining the 1% Rule
« Reply #25 on: December 17, 2020, 08:06:26 AM »
In the US, I've never seen/heard of a condo association that charged that little for maintenance, unless they were underfunding the reserves (in which case you can await the dreaded $30,000 "special assessment" for a new roof/exterior paint/etc which can wipe out your profits for the last decade and more in one fell swoop).

But in theory, condos can be cheaper to maintain than a SFH, for sure. Just surface area/volume means there's less exterior per unit of interior space. Our discussion (I thought) was about SFHs, which is what most US real estate mom-and-pop investors buy.

-W

vand

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Re: Examining the 1% Rule
« Reply #26 on: December 17, 2020, 08:12:59 AM »
Assuming by "flat," you mean a unit in a shared building, then it would have completely different maintenance costs compared to a single family residence. Directly comparing the two is like comparing apples and sheet metal. I'm sure you pay a maintenance fee for the building - how much is that and what does adding it in (which is only fair!) make your mythical 0.3% into?

yeah, an Apartment. And I already pointed out that the maintenance costs are completely different to, say, a detatched home.

The flat's market value is about 400k and I pay 1700pa to the management company a year. That pays for all the buildings maintenance, and also includes the insurance.


waltworks

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Re: Examining the 1% Rule
« Reply #27 on: December 17, 2020, 08:22:38 AM »
That is astoundingly, insanely cheap by US standards, probably less than just management would cost here, let alone maintenance fees or taxes.

HOA (maintenance) fees for even low-end places (ie, no pool or amenities) run around $300/mo here. Fees tend to rise after the first 10 years or so as maintenance costs pile up, they're artificially lower when new and the builder is trying to attract buyers.

Management would cost (assuming you're renting for at least $2k/mo or so) $150-200/mo here.

Insurance would run (I just looked at a couple ~$400k condos in big buildings in SLC to check) $150/mo or so.

Are there property taxes at all? A $400k SFH here in Utah would be taxed at *roughly* $4000-5000 per year, depending on the county. A condo/apartment would be lower, but still $2500-3000 annually. And this is a low tax state!

So costs for your investment in Utah would be at least 5 times what you're paying, not including any interior maintenance. You're paying less for *everything* than the *cheapest* of 4 categories of expense here.

-W
« Last Edit: December 17, 2020, 08:37:01 AM by waltworks »

maizefolk

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Re: Examining the 1% Rule
« Reply #28 on: December 17, 2020, 08:36:47 AM »
My guess is that the management and maintenance is not actually astonishingly cheap, but that the cost of property in the UK is astonishingly high, which drives everything else down as a percent of the value of the property.

There may also be a word meaning issue. vand, when you say "management" is that a company you hire to run your rental for you? Or the service/company which runs the apartment building in which your rental flat is located? Since you say it includes insurance and maintenance I'm wondering if the better analogy to costs here in the USA would be things like condo/HOA fees rather than what a property management company would charge to operate a rental unit.

waltworks

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Re: Examining the 1% Rule
« Reply #29 on: December 17, 2020, 08:37:38 AM »
Hmm. I don't know. HOA fees on even a $150k property here that is comparable (big building) are rarely under $200/mo. Even if you inflate the value of that place a LOT, you're not going to end up with taxes, insurance, HOA, management being 0.3%.

I'd roughly estimate carrying costs for a $400k condo here to be in the ballpark of $10,000 a year in taxes, insurance, HOA, and management, though that might be a little low. So 2.5%. The condo would have to appreciate to like $3.3 million to hit 0.3% (and taxes would have to stay flat).

-W

My guess is that the management and maintenance is not actually astonishingly cheap, but that the cost of property in the UK is astonishingly high, which drives everything else down as a percent of the value of the property.

« Last Edit: December 17, 2020, 08:41:22 AM by waltworks »

vand

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Re: Examining the 1% Rule
« Reply #30 on: December 17, 2020, 08:47:53 AM »
My guess is that the management and maintenance is not actually astonishingly cheap, but that the cost of property in the UK is astonishingly high, which drives everything else down as a percent of the value of the property.

There may also be a word meaning issue. vand, when you say "management" is that a company you hire to run your rental for you? Or the service/company which runs the apartment building in which your rental flat is located? Since you say it includes insurance and maintenance I'm wondering if the better analogy to costs here in the USA would be things like condo/HOA fees rather than what a property management company would charge to operate a rental unit.

This is correct. 

House prices in this country (and most other countries) are much higher relative to incomes and than most of the US. I'm always astounded by how cheap the headline price of houses are in the US, however it is not quite comparing apples to apples.

Here in the UK you can expect 4% in rental yield in HCOLs areas, 5-6% in MCOLs, and up to 8 in shitholes LCOLs.

Our mortgage markets are also very different. We tend to borrow on a 2-5yr fixed/discounted rates and then remortgage every few years, with borrowing rates depending on how much you borrow as low as 1.2%.

Our houses are smaller - typically an apartment will be 500-800sqft and a family home between 900-1800sqft. Anything larger than 2000sqft is considered a palace.

They are cheaper to run and heat - we use about 4,000 kwHs energy per house per year, compared to a US home which will use about 3 times as much.

(
By management company I mean the freeholders of the flat. Here, flats are overwhelmingly bought on a leasehold basis, while houses tend to be boght on freehold basis. Leases granted by the freeholder and have uniform stipulations to make sure that there is harmony between you and your neighbours.
)
« Last Edit: December 17, 2020, 09:00:14 AM by vand »

waltworks

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Re: Examining the 1% Rule
« Reply #31 on: December 17, 2020, 09:02:07 AM »
How do taxes work? Are there just no property taxes in the UK?

-W

vand

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Re: Examining the 1% Rule
« Reply #32 on: December 17, 2020, 09:55:22 AM »
On main residences there is a tiered stamp duty tax to pay by the buyer. Importantly, there is no capital gains tax on main residences.

On 2nd homes and investments the stamp duty is higher, and there is also income tax that falls into line with standard income tax rates, and also capital gains to consider if you ever sell it.

The main reason why home prices are so high here are:

- Borrowing rates are so low, as I mentioned, you can borrow from about 1.2%
- On the supply side we don't build enough houses because we have quite restrictive land laws. A cynic would say this was by design to keep home prices high.
- On the demand side, we have a benefits system that allows the local authority to rent a house at a fair market rate from a private landlord in order to house a family. This naturally puts a floor under what rents a landlord can get and MASSIVELY supports high home prices.

Basically, we have a system that is is neither free-market nor socialist, but arguably combines the the worst of both worlds.

waltworks

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Re: Examining the 1% Rule
« Reply #33 on: December 17, 2020, 10:04:13 AM »
I agree that with basically no expenses, and mortgage rates around 1%, the 50% and 1% "rules" probably don't apply well.

In the US, they most certainly do.

-W

PMJL34

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Re: Examining the 1% Rule
« Reply #34 on: December 17, 2020, 10:35:12 AM »
Vand,

Thanks for the information. Sounds like we are in two different universes.

You are in UK, you are talking about a condo, and your entire cost system is different.

With that said, my bet is that you are making no money at all on a rental that costs 400k and rents for 2k. Rentals just aren't as lucrative in UK from my understanding, unless you are betting on appreciation.

Also, your maintenance costs are insane if true, $300 to paint? you must be talking about patch up paint for one wall or a small room. The whole home cost cannot be $300 by a professional. I don't care what you say. Replacing dual pane windows for $300? Are you sure you aren't doing it yourself? I feel like so much is being miscommunicated.


 

« Last Edit: December 17, 2020, 10:36:54 AM by PMJL34 »

vand

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Re: Examining the 1% Rule
« Reply #35 on: December 18, 2020, 02:21:45 AM »
Vand,

Thanks for the information. Sounds like we are in two different universes.

You are in UK, you are talking about a condo, and your entire cost system is different.

With that said, my bet is that you are making no money at all on a rental that costs 400k and rents for 2k. Rentals just aren't as lucrative in UK from my understanding, unless you are betting on appreciation.

Also, your maintenance costs are insane if true, $300 to paint? you must be talking about patch up paint for one wall or a small room. The whole home cost cannot be $300 by a professional. I don't care what you say. Replacing dual pane windows for $300? Are you sure you aren't doing it yourself? I feel like so much is being miscommunicated.

Yes, my rental is not the best in terms of performance.

I have 132k of my own money in the property, and 268k borrowed against it at 2%. It rents for 17k/pa, and after I deduct mortgage and taxes I am left with about 9k in after tax income.

Still, for a cash on cash after-tax return I get 7%.

If I could snap my fingers and pull all my money out of it I would do just that, but doing so would incur some hefty capital gains tax bills, so I'm happy to collect my 7%.

My costs are pretty accurate, but yes we may mean completely different things: by paint, I just mean painting the interior walls. Nothing fancy, just redecorating the place look to nice and new. It's a couple of tubs of paint at about $40 a tub. Window pane replacement just consisted of the glass elements, not the whole window frame.

Actually here's some recent pics of the flat: https://photos.app.goo.gl/1SfjaTzAXgMY4dWC7

Americans will probably be shocked and think that nobody can live in a shoebox like that, but that's how it is over here.

Dicey

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Re: Examining the 1% Rule
« Reply #36 on: December 18, 2020, 02:51:27 AM »
^^I'm not shocked, but I am curious. Is that the only bedroom? Are these places designed for singles? How does a couple sleep on one twin bed? Not very comfortably, it seems. The rest of the apartment looks reasonably spacious.

In the US, most refrigerators are designed with reversible door handles, though many folks are blissfully unaware of that. The one in the photos is not only awkwardly backwards, but due to the water dispenser, it doesn't look to be reversible either. Do they sell left- and right-handed refrigerators there?

Oh, and why did the bathroom need to be remodeled twice?

Thanks for the RE porn, BTW.

vand

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Re: Examining the 1% Rule
« Reply #37 on: December 18, 2020, 04:06:39 AM »
^^I'm not shocked, but I am curious. Is that the only bedroom? Are these places designed for singles? How does a couple sleep on one twin bed? Not very comfortably, it seems. The rest of the apartment looks reasonably spacious.

In the US, most refrigerators are designed with reversible door handles, though many folks are blissfully unaware of that. The one in the photos is not only awkwardly backwards, but due to the water dispenser, it doesn't look to be reversible either. Do they sell left- and right-handed refrigerators there?

Oh, and why did the bathroom need to be remodeled twice?

Thanks for the RE porn, BTW.

These were just some supplementary pictures, not the main ones which I used to advertise the flat and which aren't online any more. The flat is 2 bedrooms and is about 660sq ft.

We modernised the bathroom 5 years ago, but also needed to redo the taps and plumbing earlier this year.

sorry, no idea about the refridgerators I 'm afraid! The one in flat itself was 2nd hand but has been working just fine since we got it 10yrs ago. TBH the water dispenser is a bit of a PITA and not very effective. Still, it keeps food cool, which is its main job.

waltworks

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Re: Examining the 1% Rule
« Reply #38 on: December 18, 2020, 07:05:08 AM »
That's some insane cheap labor (to paint). I had a basement apartment painted a couple of years ago. Slightly bigger than your place (900 sq feet) but a new build, so no need to move any furniture or be careful with someone's possessions. Inexpensive (though low VOC) one-tone paint that I think was about $200 total.

Labor was $2500, though I'm guessing we could have gotten it done for $500-1000 cheaper if we spent a lot of time getting bids. Maybe.

So again your costs are like 1/10 of ours. Chapeau!

-W

maizefolk

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Re: Examining the 1% Rule
« Reply #39 on: December 18, 2020, 07:29:00 AM »
Waltworks, I understood vand to be saying is that they painted the apartment themself ("It's a couple of tubs of paint at about $40 a tub.") not that the cost of paint + the cost of hiring outside labor to paint an apartment would be that low in the UK.

Our houses are smaller - typically an apartment will be 500-800sqft and a family home between 900-1800sqft. Anything larger than 2000sqft is considered a palace.

Americans will probably be shocked and think that nobody can live in a shoebox like that, but that's how it is over here.

I think you may be getting a bit of distorted view of americans from TV and/or reading the antimustachian wall of shame and comedy board here. I spent plenty of time living in a ~350 square ft apartment alone and an ~600 square foot apartment with a flatmate in my 20s. Now, with surplus money, I live in a freestanding house that is ~1,000 square feet. Rent on that ~350 square foot apartment was substantially higher than my mortgage today. That's regional variation in the cost of living for you.

We definitely do have plenty of "palace" houses over here, which pulls up the average size and average energy consumption. But my guess is most americans wouldn't be shocked at the thought of a 600 square foot apartment or a 1000 square foot freestanding house.

waltworks

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Re: Examining the 1% Rule
« Reply #40 on: December 18, 2020, 07:38:21 AM »
I guess I'm not sure either. $300 is an awful lot of paint for a small apartment. But it's also almost nothing if someone else is painting. So I'm confused by that one.

Agreed that a lot of 'merican houses and apartments are not as huge and luxurious as people think. HGTV (which I have only seen when waiting for a prescription at the pharmacy) has almost nothing to do with how actual people live.

-W

vand

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Re: Examining the 1% Rule
« Reply #41 on: December 18, 2020, 09:14:39 AM »
$300 doesn't include any labour costs - I painted it all myself!!

As I said, I didn't cost for any of my own time or labour in the numbers I have given. (Although that said, how much can it cost to hire some labour for a day to paint a few walls blanche white? I reckon I could easily get it outsourced to someone for $150.)

Maybe that gives a false impression of costs, but we've always acknowledged that real estate is not a completely passive investment vehicle.  If you want a completely passive real estate experience then just buy REITs with a few clicks of the mouse.

I personally enjoy the whole landlording process, just as I enjoy researching and enhancing my understanding of all investments, so its difficult to say how much my time spent is actually worth.
« Last Edit: December 18, 2020, 09:17:37 AM by vand »

maizefolk

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Re: Examining the 1% Rule
« Reply #42 on: December 18, 2020, 09:29:22 AM »
Okay, so paint is noticeably more expensive in the UK than in the USA, but that makes sense given everything else I know about the relative cost of living between the two countries.

I don't know about the US vs the UK specifically, but I have heard that anything that involves hiring tradespeople tends to be much more expensive to complete in the USA than in many countries in Europe. The quote below is about bigger public works projects, but I'd imagine we might see similar differentials in labor costs for individual landlords.

Quote
Although the material and equipment costs are similar (within 10%) for projects in the United States and in Europe, labor costs are substantially higher in the United States as outlined above. For example, in California the average billing labor rates for qualified tunnel workers is about $70/hr and the average New York labor rate of qualified tunnel workers is at over $100/hr, whereas in Germany (one of the high labor rates countries in Europe) the comparable labor rate is about $30/hr. In other European countries such as Spain, Portugal, Italy, Poland, etc., labor rates are even lower. The EU legislation allowing workers from lower paid countries such as Spain and Poland working in other EU countries keeps the labor cost low.

Union rules are significantly different in Europe vs the United States, especially as related to overtime and number of workers in a tunnel. For example, in New York, the number of workers at the face of the tunnel can be up to four times the number of workers required in Germany or Austria for similar projects. Overtime in the United States is paid using a factor of up to 2 or 3 of the base rates; while in Germany for example, overtime is compensated by time off instead.

waltworks

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Re: Examining the 1% Rule
« Reply #43 on: December 18, 2020, 10:18:43 AM »
Wow, Maizefolk, I did a little looking into this too... and you're right. Labor rates are like just not that much over 3rd world level in the EU/UK for a lot of stuff that is really well paid (ie painter, plumber, electrician) here in the states.

I had no idea. I guess in a way I'm glad rental overhead is expensive here - people are getting paid a decent wage to do that work, at least. Then again if they get cancer they're totally screwed.

-W

PMJL34

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Re: Examining the 1% Rule
« Reply #44 on: December 18, 2020, 10:23:45 AM »
Vand,

Thanks for the follow up. Your flat looks great to me! May your current tenant/s be a wonderful one for many years to come and your flat be sturdy for many more. Cheers!

PMJL34

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Re: Examining the 1% Rule
« Reply #45 on: December 18, 2020, 10:26:51 AM »
Walt and Maize,

The cheaper labor makes sense I guess. We know that everything in US is inflated (including income) so it makes sense that UK would be cheaper. Just not $150 cheap imo.

It also puts into perspective how expensive/overpriced their homes are compared to US. We have substantially higher incomes, yet cheaper homes. Go figure. This is the reason why I said that UK rental market isn't great, but I'm glad Vand is able to make it work.

Dicey

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Re: Examining the 1% Rule
« Reply #46 on: December 18, 2020, 12:10:17 PM »
Walt and Maize,

The cheaper labor makes sense I guess. We know that everything in US is inflated (including income) so it makes sense that UK would be cheaper. Just not $150 cheap imo.

It also puts into perspective how expensive/overpriced their homes are compared to US. We have substantially higher incomes, yet cheaper homes. Go figure. This is the reason why I said that UK rental market isn't great, but I'm glad Vand is able to make it work.
Uh, not everywhere.

PMJL34

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Re: Examining the 1% Rule
« Reply #47 on: December 18, 2020, 04:33:46 PM »
Dicey, odds are we are neighbors, so we share the same pain wen it comes to real estate prices :)

However, even our inflated prices, are low compared to other world capitals. As they say, "it could be worse!"

marty998

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Re: Examining the 1% Rule
« Reply #48 on: December 22, 2020, 01:37:06 PM »
$1.2 million median Sydney has entered the chat.

vand

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Re: Examining the 1% Rule
« Reply #49 on: December 23, 2020, 05:20:31 AM »
$1.2 million median Sydney has entered the chat.

What does that work out price per sq ft?

My rental about is 660 sqft, (61sqm), so with a market price of 400k it works out as 606/sqft ($805USD /sqft) which is fairly typical in London.
My current home is about 625/sqft ($831USD/sqft)