Author Topic: Exceptions to the 1% Rule?  (Read 2297 times)

NW Girl

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Exceptions to the 1% Rule?
« on: August 24, 2016, 03:34:20 PM »
I live in a townhouse in Seattle, just a few miles north of the Amazon campus. The real estate market is extremely hot right now in my area. My own townhouse has appreciated in value ~$125,000 in the last three years.  Everything that is put on the market sells within days….even condos and townhouses.

So I've noticed the townhouses in my neighborhood are mostly being purchased by investors. The average sale price of these townhouses is somewhere between $475,000 - $525,000 depending on size, condition, etc. Yet they are only renting out for around $2400 - $2800. I've never heard of one renting above $3000.
I'm unsure if the investors buying these places are individuals or large companies.

I'd consider myself a novice in all things real estate….but I know the 1% rule. What am I missing? Why would investors be snatching these places up if they can't get close to 1% back in monthly rent?

NW Girl

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Re: Exceptions to the 1% Rule?
« Reply #1 on: August 24, 2016, 03:40:35 PM »
PS - Should I sell and cash out, like tomorrow?  Just kidding - I have nowhere else to go (that at least would be cheaper and near work)

Another Reader

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Re: Exceptions to the 1% Rule?
« Reply #2 on: August 24, 2016, 03:51:41 PM »
They are buying for appreciation, not cash flow.  They hope to cover their expenses with the rent and sell to the next buyer at a much higher price.  That can work well if you get in early in a rapidly appreciating market that has legs.  Not so much in a market that's near the top. 

Some buyers are moving cash out of their home countries to what they see as safer places to keep their wealth.  They are willing to sacrifice yield for safety.

Markets are cyclical.  If you are in a high demand market like Seattle, now might not be a good time to buy.  Wait for the next downturn and you will be better positioned for cash flow and appreciation.

NW Girl

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Re: Exceptions to the 1% Rule?
« Reply #3 on: August 24, 2016, 10:01:17 PM »
Ah…thanks Another Reader….I'm sure you're correct and it seems blatantly obvious now. I guess I hadn't thought of that because I agree with you….there probably isn't a lot of appreciation left in this cycle before the next downturn.  But I guess no one knows for sure.

Sammiecakes

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Re: Exceptions to the 1% Rule?
« Reply #4 on: August 24, 2016, 11:01:41 PM »
Ah…thanks Another Reader….I'm sure you're correct and it seems blatantly obvious now. I guess I hadn't thought of that because I agree with you….there probably isn't a lot of appreciation left in this cycle before the next downturn.  But I guess no one knows for sure.

On the other hand I keep hearing anecdotal reports of people's tech worker friends in the bay area trying to transfer to Seattle because of how cheap the housing in Seattle is comparatively (not to mention the taxes are lower). And I know Amazon and Google are expanding rapidly in Seattle right now. Those workers gotta live somewhere.

The other thing to keep in mind is that the 1% rule makes certain assumptions about your maintenance expenses, but those expenses will be lower as a percentage of your house price in an expensive market than a cheap market. Also often your property taxes are a lower percentage of the house price in hot real estate markets as well. So really in an expensive market probably you should use some lower percentage as the rule. Best to actually run the numbers on a case by case basis with maintenance estimates.
« Last Edit: August 24, 2016, 11:08:47 PM by Sammiecakes »

NoNonsenseLandlord

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Re: Exceptions to the 1% Rule?
« Reply #5 on: August 25, 2016, 05:56:13 AM »
I'd consider myself a novice in all things real estate….but I know the 1% rule. What am I missing? Why would investors be snatching these places up if they can't get close to 1% back in monthly rent?

Consider the people buying the properties novices too.  Investors can and will go broke...

The 1% rule is a guideline.  There are also other guidelines.  Like Gross rent Multiplier.  Some people like a GRM to be less than 10.  I like it to be 6.  Cap rates should be based on the neighborhood, but should always be greater than 6, always.  In a working class neighborhood, it should be 8-10.

Never count on appreciation, or depreciation, to make money.  Prices and rents are a function of wages.  If wages are not headed up, neither will prices.  If interest rates go up, prices will come down.  You are seeing a shortage of properties and limited investment alternatives.  Real estate is risky.  You need a risk premium.

Enigma

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Re: Exceptions to the 1% Rule?
« Reply #6 on: August 25, 2016, 11:11:38 AM »
Seattle sounds like a renter’s market vs a landlord’s market.  I would say that Washington DC is about the same.  Rent prices do not tend to go over 3k per month but properties are selling between 750k-1.3Mil.

clarkfan1979

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Re: Exceptions to the 1% Rule?
« Reply #7 on: August 27, 2016, 11:06:15 PM »
Jobs are going to be a big influence on the price. Seattle has a lot of tech jobs, so the sky is the limit for those jobs. If people are making 200K/year, it's not really a bubble. Unless there is a tech crash and everyone loses their jobs.

Florida has a lot of people pay cash and the buyers are not concerned about jobs. The retirement folks are actually against jobs, because they don't want their beaches to be crowded. They already have enough money and don't need a job.

I have a relative that sells homes in Colorado. Not quite Denver. At least an hour away. At least 25% are people who are retiring and pay cash. They are interested in purchasing a lifestyle. They don't care about jobs either.

rothwem

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Re: Exceptions to the 1% Rule?
« Reply #8 on: August 29, 2016, 07:37:54 AM »
I'd consider myself a novice in all things real estate….but I know the 1% rule. What am I missing? Why would investors be snatching these places up if they can't get close to 1% back in monthly rent?

Consider the people buying the properties novices too.  Investors can and will go broke...

The 1% rule is a guideline.  There are also other guidelines.  Like Gross rent Multiplier.  Some people like a GRM to be less than 10.  I like it to be 6.  Cap rates should be based on the neighborhood, but should always be greater than 6, always.  In a working class neighborhood, it should be 8-10.

Never count on appreciation, or depreciation, to make money.  Prices and rents are a function of wages.  If wages are not headed up, neither will prices.  If interest rates go up, prices will come down.  You are seeing a shortage of properties and limited investment alternatives.  Real estate is risky.  You need a risk premium.

I agree with just about all of this post. 

However, home prices generally do not track wages very well.  Rents, however, do.  This is the main reason why houses can be bid up to silly levels of overvaluation while the rents are still reasonable. 

NoNonsenseLandlord

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Re: Exceptions to the 1% Rule?
« Reply #9 on: August 29, 2016, 06:09:36 PM »

Consider the people buying the properties novices too.  Investors can and will go broke...

The 1% rule is a guideline.  There are also other guidelines.  Like Gross rent Multiplier.  Some people like a GRM to be less than 10.  I like it to be 6.  Cap rates should be based on the neighborhood, but should always be greater than 6, always.  In a working class neighborhood, it should be 8-10.

Never count on appreciation, or depreciation, to make money.  Prices and rents are a function of wages.  If wages are not headed up, neither will prices.  If interest rates go up, prices will come down.  You are seeing a shortage of properties and limited investment alternatives.  Real estate is risky.  You need a risk premium.

I agree with just about all of this post. 

However, home prices generally do not track wages very well.  Rents, however, do.  This is the main reason why houses can be bid up to silly levels of overvaluation while the rents are still reasonable.

Housing prices track the rate of inflation over the longer term.  Wages track inflation, over the shorter term.  Rents tend to move faster, and align more closely with wages, as the investment is shorter.