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.