Author Topic: quality over quantity and why the 1% rule hurts you in building wealth  (Read 2317 times)

clarkfan1979

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You hate your job and want to replace it with a career as a property manager? Great! Buy shitty houses for 50K and rent them out for 650/month. However, if you want to build wealth, buy houses for 200K and rent them for $1600/month. You will have less headaches, more appreciation and more wealth.

If you blindly follow the 1% rule, then you are ignoring the 3 main principles of real estate which are (1) location (2) location and (3) location.

Here is my first deal, which most people would tell you is a horrible rental. It's a college rental within 1/2 miles of Colorado State University, Fort Collins, CO. 4 bed/2 bath/2 car garage single family home.

2007: Purchase price of 182K and 10K of rehab. Original PITI of $1050/month at 6%. Rents for $1250/month.
2009: Re-fied into 4.75%. New PITi is $950/month.
2019: Worth about 390K. Rents for $2500/month. Because of great location, 0% vacancy over 12 years.

The house is on a very uncommon oversized lot, which gives me the option to build a 2nd home on the property. However, because the original house is in the middle of the lot, I would have to knock down the original house and build two houses on each side of the lot. I plan on doing that in about 10-15 years. I'm going to try to time it when the economy slows and the cost of labor goes down. 




nereo

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #1 on: August 21, 2019, 06:06:48 PM »
Because of great location, 0% vacancy over 12 years.


Curious - how do you manage repairs and maintenance with no vacancies?  Do you put your renters up in motel/hotel rooms while you do the necessary work?

Jon Bon

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #2 on: August 21, 2019, 07:20:54 PM »
Ok, Ill bite.

I don't think anyone on here would recommend buying either of your hypothetical rentals, neither would not be worth owning in my experience.

The 3 main principals of Real Estate Investing are:
1) Return
2) Return
3) Return

In a purely economic analysis, It was a bad rental in 2007 It is still a bad rental in 2019

What you did do was win the speculation derby. Hey you did great, you have a house that is worth more then double what you paid. You built a lot of wealth. The cash-flows on that house are still pretty bad for what it is valued at according to your numbers (ignoring the epic tax bill if you sold)

What you did is not repeatable, its like telling someone to go out and only pick winning stocks you know? I too have rentals that I should maybe sell if we are having a purely theoretical discussion. So I am not going to insist you sell yours. But to maintain that holding a house that provides so little cash based on its value is perhaps disingenuous?

The 1% rule is not infallible. But it sure is a quick and dirty way for valuing properties that internet strangers are asking questions about. My biggest issue on these boards is not if a house hits the 1%, its folks on here thinking that their former primary residence would make a good rental because rent barely covers the mortgage.




Papa bear

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #3 on: August 21, 2019, 07:25:06 PM »
Every Tom dick and harry made money buying real estate after the 2006 peak.  We all think weíre geniuses.  Right?

I for one think speculating is a terrible way to ďinvestĒ.  My business partner made a cool 1/4mil on bitcoin, because he was god damn lucky.  You can do the same with real estate. But the 1% rule works because, you know, math.  Not crystal ball, taro card reading hogwash.

I bought a place at peak 2006.  65k, rented for 800.  I knew market rent was 1200 for a fixed up place.  So I bought it, put in 20k, and rented it at 1200. Thatís the damned 1% rule working even in peak ďtop is inĒ numbers.  Today that place has market rents of 1600-1800 and market value of around 180. 

Not saying I didnít get lucky on some of my other places (they did better than expected, but still would cash flow at worst case scenario as the above example) but youíre better off buying a 2 unit for 130k, putting in 70k and then renting it for 1800/side for a total rent of 3600/month.   That blows away most appreciation ďrentals.Ē





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Archipelago

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #4 on: August 21, 2019, 08:04:34 PM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

clarkfan1979

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #5 on: August 22, 2019, 06:15:08 AM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #6 on: August 22, 2019, 06:36:17 AM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.

From what I see your numbers are off: $50k in the S&P500 in March '07 would be $130k today - a net gain of $80k. That's about as passive an income stream as there is. Taxes, property appreciation and principle pay-down could of course tip that back in favor of your rentals, albeit with more work.

How do you handle repairs with a 0% vacancy rate over 12 years?

Papa bear

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #7 on: August 22, 2019, 06:48:26 AM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

Itís ignoring that the house was most likely purchased using leverage of funds.   So, no, not like buying the market.  OP made a killing on that house.


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ecchastang

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #8 on: August 22, 2019, 06:54:45 AM »
Yes, getting lucky and buying at a low time before a strong real estate boom is always a good idea.  However, in practice, that is a little harder to do.  Many others who bought around Mar 2007 are still underwater on their loan (or would be had they not foreclosed). 

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #9 on: August 22, 2019, 06:56:23 AM »
Nice to know Iím not the only one. We bought a property for $240k, initially rented for $1200/mth. Itís now worth $400k, renting for $1600/month (rent controlled). Itís made us money (tenant basically paid my mortgage and HOA fees), but we didnít buy it primarily as an investment.

At the time, property prices were increasing by 10-20% per year, and we didnít know when we would return to our home country, so we wanted to get our foot in the property market as there was a risk we would be priced out of the market.

We wanted low maintenance, so we bought a brand new luxury condo on a subway line and target well-educated young white collar professionals. So far, it has had no vacancies or major issues. Weíve only had one repair, and the tenant stayed in the unit while the repair was being done, just like how we as an owner would have stayed in the unit if we were repairing stuff.

Papa bear

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #10 on: August 22, 2019, 07:09:04 AM »
Because of great location, 0% vacancy over 12 years.


Curious - how do you manage repairs and maintenance with no vacancies?  Do you put your renters up in motel/hotel rooms while you do the necessary work?

College rentals are pretty cool. I know some leases are 12 equal installments of rent, but arenít true 365 days / year and have a 2 week period either on the front or back end to flip the units.

I do prorated leases for when the tenant gains occupancy.  My true ďvacancyĒ rate is around .005 - .0075. 

Repairs happen while tenant occupied or during school holiday breaks.  Tenants normally do not move in or move out at the exact lease period.  School schedules mess with a lot of this.

I had my first major overhaul this year on 2 units.  I had 3 weeks of no rent vacancy for 1 unit and 5 weeks for the other.  That will affect my overall numbers, but over a 13 year period, thatís not too bad.


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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #11 on: August 22, 2019, 07:19:30 AM »
Because of great location, 0% vacancy over 12 years.


Curious - how do you manage repairs and maintenance with no vacancies?  Do you put your renters up in motel/hotel rooms while you do the necessary work?

College rentals are pretty cool. I know some leases are 12 equal installments of rent, but arenít true 365 days / year and have a 2 week period either on the front or back end to flip the units.

I do prorated leases for when the tenant gains occupancy.  My true ďvacancyĒ rate is around .005 - .0075. 

Repairs happen while tenant occupied or during school holiday breaks.  Tenants normally do not move in or move out at the exact lease period.  School schedules mess with a lot of this.

I had my first major overhaul this year on 2 units.  I had 3 weeks of no rent vacancy for 1 unit and 5 weeks for the other.  That will affect my overall numbers, but over a 13 year period, thatís not too bad.


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Thanks for your input, Papa bear - our new place will be in an area with a lot of college renters and so we're considering how to approach what's effectively a self-contained apartment with private entrance in our primary residence.  Having rented previous homes I always had a month of vacancy to paint/repair/upgrade the apartment, and there was pretty mnuch always work needed to be done after a 1-2year renter.  In other threads the OP has mentioned how students move out July 31st nad new ones (always) move in Aug 1st.  Never considered that students move out early (but apparently continue to pay) giving me a chance to make the repairs.

Papa bear

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #12 on: August 22, 2019, 07:56:43 AM »
Because of great location, 0% vacancy over 12 years.


Curious - how do you manage repairs and maintenance with no vacancies?  Do you put your renters up in motel/hotel rooms while you do the necessary work?

College rentals are pretty cool. I know some leases are 12 equal installments of rent, but arenít true 365 days / year and have a 2 week period either on the front or back end to flip the units.

I do prorated leases for when the tenant gains occupancy.  My true ďvacancyĒ rate is around .005 - .0075. 

Repairs happen while tenant occupied or during school holiday breaks.  Tenants normally do not move in or move out at the exact lease period.  School schedules mess with a lot of this.

I had my first major overhaul this year on 2 units.  I had 3 weeks of no rent vacancy for 1 unit and 5 weeks for the other.  That will affect my overall numbers, but over a 13 year period, thatís not too bad.


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Thanks for your input, Papa bear - our new place will be in an area with a lot of college renters and so we're considering how to approach what's effectively a self-contained apartment with private entrance in our primary residence.  Having rented previous homes I always had a month of vacancy to paint/repair/upgrade the apartment, and there was pretty mnuch always work needed to be done after a 1-2year renter.  In other threads the OP has mentioned how students move out July 31st nad new ones (always) move in Aug 1st.  Never considered that students move out early (but apparently continue to pay) giving me a chance to make the repairs.

My leases are August 1 to July 31.  I guarantee the units by August 15, but try to get it available ASAP. I prorate August rent based on the date that someone moves in. 

On a regular year, students usually move out the weekend before the 31st, wherever that lies, so sometimes the 31st.  Then I get in, slam as much as I can, usually to get someone in by the 2nd or 3rd.  You will get outgoing srís that get jobs in other cities. They might want to move out 3-6 weeks early.  I usually work with those groups to be reasonable.   Maybe they pay 1/2 of July and I keep 1/2 of deposit, etc. 

Some leases in my area are 12 equal installments.  But they are August 15 - July 31 or August 1 - July 15.  You just need to know the local college rental ďculture.Ē


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Jon Bon

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #13 on: August 22, 2019, 08:36:48 AM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.

Well if you used leverage to buy that stock my back of the napkin math shows its actually nearly identical.

All you have to do is find today's version of the front range/Austin/Seattle and you can easily do this! The hard part is KNOWING what areas are going to increase. There is no sure thing in RE just like there is not in the stock market.

Papa bear

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #14 on: August 22, 2019, 09:02:40 AM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.

Well if you used leverage to buy that stock my back of the napkin math shows its actually nearly identical.

All you have to do is find today's version of the front range/Austin/Seattle and you can easily do this! The hard part is KNOWING what areas are going to increase. There is no sure thing in RE just like there is not in the stock market.

Yes thatís true.  OPís investment tracked the market returns.  Where he really made his money was leverage, which the government allows really cheap loans for real property. 

So in reality, the major gains were made because of the government allowing leverage in this way. 

Iíd like to see a counterfactual on the OPís original argument.  He stated that his way was better than the 1% rule, buy a 50k house and rent for 650.  Whereís the data on 50k houses in the Fort Collins area in 2007? What are those worth today and what are rents?  OP could have purchased 4-5 of those properties instead of the other. 

I know itís not a perfect comparison here, as the many units will have more management, headaches, etc.  but letís see those numbers!


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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #15 on: August 22, 2019, 09:44:16 AM »
I got rich buying property from 2009-2012 or so too.

I don't tell people I'm super smart or did anything special, though, or tell people to ignore the 1% rule and buy stuff willy-nilly because it's all going to turn out great.

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ecchastang

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #16 on: August 22, 2019, 12:17:15 PM »
I got rich buying property from 2009-2012 or so too.

I don't tell people I'm super smart or did anything special, though, or tell people to ignore the 1% rule and buy stuff willy-nilly because it's all going to turn out great.

-W
Worth repeating!  I bought a house in SLC 2004, and sold in 2006 as the market was peaking.  Got lucky and netted 75k.  Took until 2017 to regain the equity lost.  Sure, if I still held it now it would be worth maybe another 40-50k, but that is 13 yrs of opportunity cost where it probably wouldn't have cash flowed. 

clarkfan1979

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #17 on: August 22, 2019, 02:26:54 PM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.

Well if you used leverage to buy that stock my back of the napkin math shows its actually nearly identical.

All you have to do is find today's version of the front range/Austin/Seattle and you can easily do this! The hard part is KNOWING what areas are going to increase. There is no sure thing in RE just like there is not in the stock market.

Yes thatís true.  OPís investment tracked the market returns.  Where he really made his money was leverage, which the government allows really cheap loans for real property. 

So in reality, the major gains were made because of the government allowing leverage in this way. 

Iíd like to see a counterfactual on the OPís original argument.  He stated that his way was better than the 1% rule, buy a 50k house and rent for 650.  Whereís the data on 50k houses in the Fort Collins area in 2007? What are those worth today and what are rents?  OP could have purchased 4-5 of those properties instead of the other. 

I know itís not a perfect comparison here, as the many units will have more management, headaches, etc.  but letís see those numbers!


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This is the counter-argument that I was hoping someone would suggest. Papa Bear made many great points. What a breadth of fresh air. I'm used to mostly negative comments from the grumpy regulars. Sitting in the back corner, drinking coffee and complaining about how bad things are and how much better things were in the "good old days"

Based on my knowledge, the 1% rule never existed in Fort Collins. It's typically been a very desirable place to live, which makes it more difficult to achieve the 1% rule. Over the last 12 years, home values and rent pretty much increased at the same rate, so the ratios are still the same.

In 2007, the 50K house for 650/month never existed or the 100K house for $1300/month. If you want the 1% rule, you need to venture out to less desirable towns.

If you only buy in places that get you the 1% rule, you are going to be ignoring the best real estate locations that are available, such as Fort Collins, CO. Northern Colorado is #2 in appreciation since 1993. Washington D.C. is #1. I got that from a recent Choose FI podcast in which their guest primarily invested in Fort Collins, CO. He openly talked about how achieving the 1% rule was not possible in Fort Collins, CO.

The biggest mistake that I currently see is people buying in very undesirable locations, to try to "achieve" the 1% rule. In my opinion, this breaks the 3 main principles of real estate, which are (1) location (2) location and (3) location. During a housing boom, it seems much more risky to buy a 1% rentals in a less desirable neighborhood than a desirable neighborhood falling short of the 1% rule.

During the next housing burst, the less desirable locations are going to take a bigger hit on rent and home values, in my opinion. I think of highly desirable locations as large cap stocks. However for rentals, your returns are bigger because you get to use leverage. Bad neighborhoods are like small cap with more volatility.

Yes, you can use leverage to purchase stocks. However, in real estate, there is no margin call. I got that from an interview from @arebelspy 

This is repeatable, if you ignore the 1% rule and focus on location.

I teach college for a living. I spend most of my days trying to help college students to think differently. It's a huge part of my life. It's who I am. I am not always 100% correct. However, I'm right more than I'm wrong and that is why I will continue to do well in real estate, in any market.     

 

, the 50K house in Fort Collins didn't exist in 2007. However, you could look to a less desirable location to achieve the 1% rule.


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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #18 on: August 22, 2019, 02:59:10 PM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.

Well if you used leverage to buy that stock my back of the napkin math shows its actually nearly identical.

All you have to do is find today's version of the front range/Austin/Seattle and you can easily do this! The hard part is KNOWING what areas are going to increase. There is no sure thing in RE just like there is not in the stock market.

Yes thatís true.  OPís investment tracked the market returns.  Where he really made his money was leverage, which the government allows really cheap loans for real property. 

So in reality, the major gains were made because of the government allowing leverage in this way. 

Iíd like to see a counterfactual on the OPís original argument.  He stated that his way was better than the 1% rule, buy a 50k house and rent for 650.  Whereís the data on 50k houses in the Fort Collins area in 2007? What are those worth today and what are rents?  OP could have purchased 4-5 of those properties instead of the other. 

I know itís not a perfect comparison here, as the many units will have more management, headaches, etc.  but letís see those numbers!


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This is the counter-argument that I was hoping someone would suggest. Papa Bear made many great points. What a breadth of fresh air. I'm used to mostly negative comments from the grumpy regulars. Sitting in the back corner, drinking coffee and complaining about how bad things are and how much better things were in the "good old days"

Based on my knowledge, the 1% rule never existed in Fort Collins. It's typically been a very desirable place to live, which makes it more difficult to achieve the 1% rule. Over the last 12 years, home values and rent pretty much increased at the same rate, so the ratios are still the same.

In 2007, the 50K house for 650/month never existed or the 100K house for $1300/month. If you want the 1% rule, you need to venture out to less desirable towns.

If you only buy in places that get you the 1% rule, you are going to be ignoring the best real estate locations that are available, such as Fort Collins, CO. Northern Colorado is #2 in appreciation since 1993. Washington D.C. is #1. I got that from a recent Choose FI podcast in which their guest primarily invested in Fort Collins, CO. He openly talked about how achieving the 1% rule was not possible in Fort Collins, CO.

The biggest mistake that I currently see is people buying in very undesirable locations, to try to "achieve" the 1% rule. In my opinion, this breaks the 3 main principles of real estate, which are (1) location (2) location and (3) location. During a housing boom, it seems much more risky to buy a 1% rentals in a less desirable neighborhood than a desirable neighborhood falling short of the 1% rule.

During the next housing burst, the less desirable locations are going to take a bigger hit on rent and home values, in my opinion. I think of highly desirable locations as large cap stocks. However for rentals, your returns are bigger because you get to use leverage. Bad neighborhoods are like small cap with more volatility.

Yes, you can use leverage to purchase stocks. However, in real estate, there is no margin call. I got that from an interview from @arebelspy 

This is repeatable, if you ignore the 1% rule and focus on location.

I teach college for a living. I spend most of my days trying to help college students to think differently. It's a huge part of my life. It's who I am. I am not always 100% correct. However, I'm right more than I'm wrong and that is why I will continue to do well in real estate, in any market.     

 

, the 50K house in Fort Collins didn't exist in 2007. However, you could look to a less desirable location to achieve the 1% rule.

I bought houses in middle class areas of the East Valley in the Phoenix market starting in 1996.  They generated rents of 0.9 to 1.0 percent per month.  I did not know the 1 percent rule as such back then, but as a real estate professional, I knew the numbers worked. 

The $124k house I bought in 1996 is worth about $350k and rents for around $1,6-$1,700 a month.  I put $25k down originally, and this property is now paid off.  I grew my wealth, but as the area became more desirable to folks moving from California, my return on current value declined.  I continue to hold those properties today because there are no better alternatives right now.  I pay off the remaining mortgages and sock away the cash the properties generate for the next downturn when the buying opportunities return. 

Because I was able to buy the early properties at favorable ratios, I have done very well.  The income enabled the purchase of more properties fairly early and the net worth grew.   I would not buy those properties today at the current ratios because they make no sense.  Despite the prospect for growth as the middle class and jobs exit California, there is no way buying at today's today's prices would grow my wealth at an acceptable rate.

I think that is one of the the biggest problems with buying properties at substantially less than one percent.  Unless you have a lot of other income, you will be struggling with cash flow and you will not be in a good position to grow your portfolio when conditions are favorable for doing that. 

clarkfan1979

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #19 on: August 22, 2019, 03:05:58 PM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.


From what I see your numbers are off: $50k in the S&P500 in March '07 would be $130k today - a net gain of $80k. That's about as passive an income stream as there is. Taxes, property appreciation and principle pay-down could of course tip that back in favor of your rentals, albeit with more work.

How do you handle repairs with a 0% vacancy rate over 12 years?

Here are my numbers.

For the S&P 500, I found the average of March 2017 to be 1,406.95. I do not remember the exact day I sold. Today it's 2,922.56. I calculate that to be an increase of 108%. If I increase 50K by 108%, I get 104K.

I owned about 10K of stock within the company of Pitney Bowes. My mom worked for the company for 25 years. I bought stock at a 15% discount from her secretary. Her secretary didn't take advantage of the perk as an employee, so I paid her for the discounted stock. I sold around $45/share in March 2007. Today it's worth $3.65/share. 

I have a great location, so the tenants have to agree to my terms. It's not that big of a deal with college students. I do most of my repairs over winter break and summer break when the house is not fully occupied. I did spend a significant amount of time during the first 6 months of intial rehab. However, since then, the repairs have been very minimal. The roof was 5 years old when I bought. The initital rehab included a new water heater and new furnance.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #20 on: August 22, 2019, 03:23:20 PM »
Your S&P calculation probably does not include dividends.  The income from your paper assets can be reinvested because it is not used to pay operating expenses or a mortgage.

The reality of your situation is that you still work for a living.  Arebelspy invested in low to mid range properties in Las Vegas at prices that allowed him to achieve well in excess of one percent per month and retired in his early 30's.  Since then he has traveled the world with the wife and kids, and recently bought a house not too far from Seattle. You will eventually be far better off than the average community college teacher because you made these investments, but it will be awhile before you can retire on your rental income.


ecchastang

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #21 on: August 22, 2019, 03:27:13 PM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.



From what I see your numbers are off: $50k in the S&P500 in March '07 would be $130k today - a net gain of $80k. That's about as passive an income stream as there is. Taxes, property appreciation and principle pay-down could of course tip that back in favor of your rentals, albeit with more work.

How do you handle repairs with a 0% vacancy rate over 12 years?

Here are my numbers.

For the S&P 500, I found the average of March 2017 to be 1,406.95. I do not remember the exact day I sold. Today it's 2,922.56. I calculate that to be an increase of 108%. If I increase 50K by 108%, I get 104K.

I owned about 10K of stock within the company of Pitney Bowes. My mom worked for the company for 25 years. I bought stock at a 15% discount from her secretary. Her secretary didn't take advantage of the perk as an employee, so I paid her for the discounted stock. I sold around $45/share in March 2007. Today it's worth $3.65/share. 

I have a great location, so the tenants have to agree to my terms. It's not that big of a deal with college students. I do most of my repairs over winter break and summer break when the house is not fully occupied. I did spend a significant amount of time during the first 6 months of intial rehab. However, since then, the repairs have been very minimal. The roof was 5 years old when I bought. The initital rehab included a new water heater and new furnance.

So you are now listing expenses not mentioned previously, plus by just stating starting and ending value of the S&P, you are forgetting 12 yrs of about 2% annual dividends. 

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #22 on: August 22, 2019, 03:51:57 PM »
ROFL. RE and stocks aren't directly comparable but if you're going to do it at least do it vaguely right (dividends reinvested).

I agree (assuming that was your point) that buying individual stocks that end up going way down is a bad idea.

It seems a bit bizarre to me that you're taking two examples of random luck (buying a house that appreciated a lot, buying stock in a single company that went way down) to make some kind of larger point that buying RE need not be based on a long established set of numbers that virtually guarantee profit. I mean, those two examples are great. But they're not particularly representative of the larger world of stock or RE investing, even in the recent past.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #23 on: August 22, 2019, 05:04:12 PM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.

Well if you used leverage to buy that stock my back of the napkin math shows its actually nearly identical.

All you have to do is find today's version of the front range/Austin/Seattle and you can easily do this! The hard part is KNOWING what areas are going to increase. There is no sure thing in RE just like there is not in the stock market.

Yes thatís true.  OPís investment tracked the market returns.  Where he really made his money was leverage, which the government allows really cheap loans for real property. 

So in reality, the major gains were made because of the government allowing leverage in this way. 

Iíd like to see a counterfactual on the OPís original argument.  He stated that his way was better than the 1% rule, buy a 50k house and rent for 650.  Whereís the data on 50k houses in the Fort Collins area in 2007? What are those worth today and what are rents?  OP could have purchased 4-5 of those properties instead of the other. 

I know itís not a perfect comparison here, as the many units will have more management, headaches, etc.  but letís see those numbers!


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This is the counter-argument that I was hoping someone would suggest. Papa Bear made many great points. What a breadth of fresh air. I'm used to mostly negative comments from the grumpy regulars. Sitting in the back corner, drinking coffee and complaining about how bad things are and how much better things were in the "good old days"

Based on my knowledge, the 1% rule never existed in Fort Collins. It's typically been a very desirable place to live, which makes it more difficult to achieve the 1% rule. Over the last 12 years, home values and rent pretty much increased at the same rate, so the ratios are still the same.

In 2007, the 50K house for 650/month never existed or the 100K house for $1300/month. If you want the 1% rule, you need to venture out to less desirable towns.

If you only buy in places that get you the 1% rule, you are going to be ignoring the best real estate locations that are available, such as Fort Collins, CO. Northern Colorado is #2 in appreciation since 1993. Washington D.C. is #1. I got that from a recent Choose FI podcast in which their guest primarily invested in Fort Collins, CO. He openly talked about how achieving the 1% rule was not possible in Fort Collins, CO.

The biggest mistake that I currently see is people buying in very undesirable locations, to try to "achieve" the 1% rule. In my opinion, this breaks the 3 main principles of real estate, which are (1) location (2) location and (3) location. During a housing boom, it seems much more risky to buy a 1% rentals in a less desirable neighborhood than a desirable neighborhood falling short of the 1% rule.

During the next housing burst, the less desirable locations are going to take a bigger hit on rent and home values, in my opinion. I think of highly desirable locations as large cap stocks. However for rentals, your returns are bigger because you get to use leverage. Bad neighborhoods are like small cap with more volatility.

Yes, you can use leverage to purchase stocks. However, in real estate, there is no margin call. I got that from an interview from @arebelspy 

This is repeatable, if you ignore the 1% rule and focus on location.

I teach college for a living. I spend most of my days trying to help college students to think differently. It's a huge part of my life. It's who I am. I am not always 100% correct. However, I'm right more than I'm wrong and that is why I will continue to do well in real estate, in any market.     

 

, the 50K house in Fort Collins didn't exist in 2007. However, you could look to a less desirable location to achieve the 1% rule.

I bought houses in middle class areas of the East Valley in the Phoenix market starting in 1996.  They generated rents of 0.9 to 1.0 percent per month.  I did not know the 1 percent rule as such back then, but as a real estate professional, I knew the numbers worked. 

The $124k house I bought in 1996 is worth about $350k and rents for around $1,6-$1,700 a month.  I put $25k down originally, and this property is now paid off.  I grew my wealth, but as the area became more desirable to folks moving from California, my return on current value declined.  I continue to hold those properties today because there are no better alternatives right now.  I pay off the remaining mortgages and sock away the cash the properties generate for the next downturn when the buying opportunities return. 

Because I was able to buy the early properties at favorable ratios, I have done very well.  The income enabled the purchase of more properties fairly early and the net worth grew.   I would not buy those properties today at the current ratios because they make no sense.  Despite the prospect for growth as the middle class and jobs exit California, there is no way buying at today's today's prices would grow my wealth at an acceptable rate.

I think that is one of the the biggest problems with buying properties at substantially less than one percent.  Unless you have a lot of other income, you will be struggling with cash flow and you will not be in a good position to grow your portfolio when conditions are favorable for doing that.

I'm guessing that you do not subscribe to the idea that because your rentals increased in value so much they are now magically bad rentals and now you need to sell them. It seems as though your rentals were closer to the 1% rule when purchased than me. However, years later, my rentals are closer to the 1% rule. If people are telling me that I need to sell because they are bad rentals, then you really need to sell, right?

You are correct that I did not include dividends. You got me.

Starting October 1, 2019, I should be around $4,000/month in total rent above PITI. After vacancy and expenses, I should be around $3,000/month. You are correct that I probably will never retire. However, once I get to $6,000/month, I should be FI. I'm thinking that will happen in about 5-10 years. I have about 700K in real estate equity at the moment. If I sold all the real estate, I would have around 550K in cash.

I did not say that my rental income was the same amount as arebelspy. I have no idea what his numbers look like. I was simply giving him credit for acknowledging that you can buy real estate with leverage, but there is no margin call.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #24 on: August 22, 2019, 05:29:52 PM »
Your first rental is at 0.64 percent per month now, based on current value.  That's typical in Phoenix as well.  The problem with this is that it is very difficult to get any traction at this ratio if you are starting out.  I got good traction early on.  Arebelspy beat us all because he got in at exactly the right time with rent to value ratios well over 1 percent.  His cash flow enabled him to retire very early.

At current values, I would not consider buying my properties.  I don't sell because there is nothing out there that would produce a higher yield and the costs and consequences of selling make the prospect unpalatable.  I really don't need to maximize the return of the existing portfolio at this point, even if I could find more productive replacement properties.  I can just stack cash and pay off the remaining mortgages.  The portfolio is structured so I pay very little income tax.  Why give up a sweet deal?  When the market turns, I will pick up more income and depreciation, which I will need as the properties reach 27 years of ownership. 

I agree with you that every property does not always have to be a 1 percent of current value at every point in time or be immediately sold.  The real estate markets have an ebb and flow to them and portfolio construction can be complicated as a result.  I just don't see that starting out with low yielding properties is a quick way to wealth and early retirement.  Your history seems to prove that.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #25 on: August 22, 2019, 05:45:10 PM »

Starting October 1, 2019, I should be around $4,000/month in total rent above PITI. After vacancy and expenses, I should be around $3,000/month. You are correct that I probably will never retire. However, once I get to $6,000/month, I should be FI. I'm thinking that will happen in about 5-10 years. I have about 700K in real estate equity at the moment. If I sold all the real estate, I would have around 550K in cash.


Ok - serious question here: if your rental rates are not that great relative to the price you could currently sell them at, why not sell?  I've always subscribed to the notion that, when evaluating 'Rent v Sell' you should ignore what your purchase price was and only focus on current rents vs potential sale price.  It's basically price-anchoring, and leads to lots of people who think their home is a great rental because they are comparing current rents with previous purchase price.


Jon Bon

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #26 on: August 22, 2019, 06:08:03 PM »
So we ignore the 1% rule (and the math!)  to focus on location is your grand repeatable plan? If that is the case why are you not buying 10 more houses just like yours? So according to you if you just find the right "location" you get 100% appreciation in 12 years. The rents you have collected sure do not look like a very good return. So in the clarkfan investing system it all hinges on finding the right "location"*

Please tell me where I can find those houses? You are speculating, not investing plain and simple

*Location tends to be factored into the price.


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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #27 on: August 22, 2019, 06:09:10 PM »

Starting October 1, 2019, I should be around $4,000/month in total rent above PITI. After vacancy and expenses, I should be around $3,000/month. You are correct that I probably will never retire. However, once I get to $6,000/month, I should be FI. I'm thinking that will happen in about 5-10 years. I have about 700K in real estate equity at the moment. If I sold all the real estate, I would have around 550K in cash.


Ok - serious question here: if your rental rates are not that great relative to the price you could currently sell them at, why not sell?  I've always subscribed to the notion that, when evaluating 'Rent v Sell' you should ignore what your purchase price was and only focus on current rents vs potential sale price.  It's basically price-anchoring, and leads to lots of people who think their home is a great rental because they are comparing current rents with previous purchase price.

You have two choices when you sell a highly appreciated asset.  Pay a boatload of capital gains taxes plus tax on the depreciation recapture, or exchange into another property.  Because I live in California, which taxes capital gains as ordinary income and at high rates, I would be paying a very high tax penalty to sell.  The exchange option is preferable, but every decent rental market in the country is priced at the high end for owner occupants and a purchase after all fees would result in an even poorer performing asset. 

It can make sense to sell a highly appreciated asset if you have enough stored "losses" to offset most or all of the gains.  I sold a house in 2017 that had been a rental for 19 years for almost 2.5 times the purchase price.  I had enough unused "losses" collected over the years to offset the gain and the depreciation recapture. 

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #28 on: August 22, 2019, 06:20:08 PM »

Starting October 1, 2019, I should be around $4,000/month in total rent above PITI. After vacancy and expenses, I should be around $3,000/month. You are correct that I probably will never retire. However, once I get to $6,000/month, I should be FI. I'm thinking that will happen in about 5-10 years. I have about 700K in real estate equity at the moment. If I sold all the real estate, I would have around 550K in cash.


Ok - serious question here: if your rental rates are not that great relative to the price you could currently sell them at, why not sell?  I've always subscribed to the notion that, when evaluating 'Rent v Sell' you should ignore what your purchase price was and only focus on current rents vs potential sale price.  It's basically price-anchoring, and leads to lots of people who think their home is a great rental because they are comparing current rents with previous purchase price.

You have two choices when you sell a highly appreciated asset.  Pay a boatload of capital gains taxes plus tax on the depreciation recapture, or exchange into another property.  Because I live in California, which taxes capital gains as ordinary income and at high rates, I would be paying a very high tax penalty to sell.  The exchange option is preferable, but every decent rental market in the country is priced at the high end for owner occupants and a purchase after all fees would result in an even poorer performing asset. 

It can make sense to sell a highly appreciated asset if you have enough stored "losses" to offset most or all of the gains.  I sold a house in 2017 that had been a rental for 19 years for almost 2.5 times the purchase price.  I had enough unused "losses" collected over the years to offset the gain and the depreciation recapture.

Thanks, that was a very insightful response. We fell under the 2/5 rule for our last rental so capital gains didn't even factor into our decision (and for us our appreciation was modest to begin with, unlike the OP).

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #29 on: August 23, 2019, 07:15:14 AM »

Starting October 1, 2019, I should be around $4,000/month in total rent above PITI. After vacancy and expenses, I should be around $3,000/month. You are correct that I probably will never retire. However, once I get to $6,000/month, I should be FI. I'm thinking that will happen in about 5-10 years. I have about 700K in real estate equity at the moment. If I sold all the real estate, I would have around 550K in cash.


Ok - serious question here: if your rental rates are not that great relative to the price you could currently sell them at, why not sell?  I've always subscribed to the notion that, when evaluating 'Rent v Sell' you should ignore what your purchase price was and only focus on current rents vs potential sale price.  It's basically price-anchoring, and leads to lots of people who think their home is a great rental because they are comparing current rents with previous purchase price.

You have two choices when you sell a highly appreciated asset.  Pay a boatload of capital gains taxes plus tax on the depreciation recapture, or exchange into another property.  Because I live in California, which taxes capital gains as ordinary income and at high rates, I would be paying a very high tax penalty to sell.  The exchange option is preferable, but every decent rental market in the country is priced at the high end for owner occupants and a purchase after all fees would result in an even poorer performing asset. 

It can make sense to sell a highly appreciated asset if you have enough stored "losses" to offset most or all of the gains.  I sold a house in 2017 that had been a rental for 19 years for almost 2.5 times the purchase price.  I had enough unused "losses" collected over the years to offset the gain and the depreciation recapture.

Thanks, that was a very insightful response. We fell under the 2/5 rule for our last rental so capital gains didn't even factor into our decision (and for us our appreciation was modest to begin with, unlike the OP).

This is one of the huge points that many of us here on the boards make with people who want to take their highly appreciated primary residence and turn it into a rental.  The capital gains tax primary home exemption is an amazing tool that canít be replicated on a consistent basis. 

A rental property that has depreciated to 0 and appreciated 100% over purchase price has a much different calculation on whether to sell or keep.  In todayís market it is exceedingly difficult to find a good rental property to 1031 exchange from the other property.  Thatís where the 350k house renting for 2200/month might not be the worst thing in the world.

Buying a 350k house at 2200/month rent OR worse, your appreciated 350k primary residence is a terrible idea that is guaranteed to cash flow negative and itís only chance of making money is a speculative bet.  If you think you have a magic 8 ball, maybe you could stock pick or only buy winning lottery tickets.


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Papa bear

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #30 on: August 23, 2019, 07:38:15 AM »
Had you invested the same amount in the S&P back in 2007, wouldn't you have done equally as well?

I sold some stock in March 2007 to purchase in May 2007. 50K in the S&P 500 would be worth about 105K today for a profit of 55K. I've probably cash flowed 60K in rent above the rent, vacancy and repairs. After you add in principle pay down and appreciation, it's not even close.

Well if you used leverage to buy that stock my back of the napkin math shows its actually nearly identical.

All you have to do is find today's version of the front range/Austin/Seattle and you can easily do this! The hard part is KNOWING what areas are going to increase. There is no sure thing in RE just like there is not in the stock market.

Yes thatís true.  OPís investment tracked the market returns.  Where he really made his money was leverage, which the government allows really cheap loans for real property. 

So in reality, the major gains were made because of the government allowing leverage in this way. 

Iíd like to see a counterfactual on the OPís original argument.  He stated that his way was better than the 1% rule, buy a 50k house and rent for 650.  Whereís the data on 50k houses in the Fort Collins area in 2007? What are those worth today and what are rents?  OP could have purchased 4-5 of those properties instead of the other. 

I know itís not a perfect comparison here, as the many units will have more management, headaches, etc.  but letís see those numbers!


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This is the counter-argument that I was hoping someone would suggest. Papa Bear made many great points. What a breadth of fresh air. I'm used to mostly negative comments from the grumpy regulars. Sitting in the back corner, drinking coffee and complaining about how bad things are and how much better things were in the "good old days"

Based on my knowledge, the 1% rule never existed in Fort Collins. It's typically been a very desirable place to live, which makes it more difficult to achieve the 1% rule. Over the last 12 years, home values and rent pretty much increased at the same rate, so the ratios are still the same.

In 2007, the 50K house for 650/month never existed or the 100K house for $1300/month. If you want the 1% rule, you need to venture out to less desirable towns.

If you only buy in places that get you the 1% rule, you are going to be ignoring the best real estate locations that are available, such as Fort Collins, CO. Northern Colorado is #2 in appreciation since 1993. Washington D.C. is #1. I got that from a recent Choose FI podcast in which their guest primarily invested in Fort Collins, CO. He openly talked about how achieving the 1% rule was not possible in Fort Collins, CO.

The biggest mistake that I currently see is people buying in very undesirable locations, to try to "achieve" the 1% rule. In my opinion, this breaks the 3 main principles of real estate, which are (1) location (2) location and (3) location. During a housing boom, it seems much more risky to buy a 1% rentals in a less desirable neighborhood than a desirable neighborhood falling short of the 1% rule.

During the next housing burst, the less desirable locations are going to take a bigger hit on rent and home values, in my opinion. I think of highly desirable locations as large cap stocks. However for rentals, your returns are bigger because you get to use leverage. Bad neighborhoods are like small cap with more volatility.

Yes, you can use leverage to purchase stocks. However, in real estate, there is no margin call. I got that from an interview from @arebelspy 

This is repeatable, if you ignore the 1% rule and focus on location.

I teach college for a living. I spend most of my days trying to help college students to think differently. It's a huge part of my life. It's who I am. I am not always 100% correct. However, I'm right more than I'm wrong and that is why I will continue to do well in real estate, in any market.     

 

, the 50K house in Fort Collins didn't exist in 2007. However, you could look to a less desirable location to achieve the 1% rule.

First, you provided the argument, that your way is better at wealth creation. You provided a counter example with no numbers, and that to your knowledge, never existed. 

I found a property near CSU, 4br home for college students, listed at 1700/month rent. Zillow estimates the value of the house at 350k+.  The last sale of this home was in 2012 for ~135k.  Given that college rental rates are normally per bedroom and normally track inflation, the rent in 2012 would have been around 1500. I know absolutely nothing about Fort Collins or CSU. But that seems to be a property that would have been great to own. Cash flowing and 200k of appreciation? Count me in.  I would take 2 of those over your example.

Now I do know a bit about Colorado, and the housing prices have been insanely inflated over the past 6-8 years.  Seems to me that you could have purchased many more homes that cash flowed and would have appreciated. 

Where you start to piss people off with your anecdotal, cherry pick your numbers, my way is best, math is dumb, argument, is where you insist that locations with 1% rule properties must be undesirable.  And to your ďknowledgeĒ Fort Collins has always been desirable because you could never find a solid cash flow rental back in 2007 until now.  Elitist of you? 

So I can cherry pick some numbers too.  I would have made 2-3x as much money as I did IF I would have bought 50k houses renting for 650 back in 2007.  Wtf! Yeah, those same places in the undesirable areas now sell for 250/300k and rent around 2200/month.   I never liked those areas, because I too, thought they were shit neighborhoods.  Go figure.   

Or hell, Iíll cherry pick the numbers for a desirable area. A suburb listed as a top 10 in the country for years.  And one of the highest median household incomes in the state I live.  Go buy a 400k new construction home, rent it back to the developer as a model, and make a good cash flow for a few years.  Then when they move on, go cash flow negative for 5 years renting at 2800, because you know, desirable area appreciation.  After a few shitty tenants, sell your used house for 425k after 10 years of ownership. Great return!

So, moral of the story.  Come back with some real numbers or stop trying to tell people who might not know any better that cash flow negative properties are the best way to wealth creation. 




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clarkfan1979

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #31 on: August 23, 2019, 07:49:31 AM »
I was in a Ph.D. program from 2006-2011. I worked about 60 hours/week and made 12K to 15K/year. I would have loved to buy more property at that time, but it didn't make sense for me at the time. I moved to Florida in 2011 and bought my second property in 2012. I really wanted to buy more property in 2013-2015, but I was really busy because I had a new job and didn't finish my dissertation until 2015. Now that everything is done with my education, I have spend more time on my theoretical approach to real estate. My latest purchase was a fixer in Koloa, HI for 603K in June 2018. I put 50K into it and it's now worth about 900K. I have 700k of equity on 1.5 million. I made an average salary of 41,600/year over the past 12 years and managed to turn 50K into 700K of equity with very little effort besides initial rehab. Could I have done more? Sure. However, I love my current life. If I had more rental income, my life wouldn't change. I have "enough". However, I do like the idea of "FI" and will continue to work toward it over the next 5 years, even though I probably won't quit my job.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #32 on: August 23, 2019, 08:36:05 AM »
As others have mentioned, when you do realize the capital appreciation, to consistently compare against a stock investor you would need to add that you'll be paying a higher capital gains tax simply because you have to sell an entire house as a unit, but index investors will sell piecemeal over many years of withdraw largely avoiding most capital gain taxes.

I would go ahead and submit a rule of thumb that to compare RE capital gains to stock gains you should assume that your RE will require paying ~10% more in capital gains taxes than your stocks would.

The only way I can imagine avoiding this is if you 1031'd all your property into something like an apartment complex and then converted it into condos so that you could sell your assets in smaller pieces, but I have no idea what those costs would entail.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #33 on: August 23, 2019, 08:37:29 AM »
Now we're just off in the weeds. Nobody is saying you did anything wrong or that your investment choices didn't work out great. You don't have to get defensive or humble-brag about your finances to justify yourself to us.

We're saying your argument against the 1% rule, based entirely on you personal anecdote, is not useful.

Luck is different than planning/skill. It's ok, I got lucky during the same time period, when I was also in a PhD program and making next to no money. A good half of my net worth is based on buying RE during that time period (mostly primary residences) that appreciated like crazy. Good stuff. But it doesn't mean the *deliberate* investor shouldn't care about the various (1%/50%, etc) metrics we have available to analyze rental properties. Do you want to trust that appreciation will continue as it has for another decade? I guess it's possible but I sure as hell wouldn't buy your place today to rent out.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #34 on: August 23, 2019, 09:10:38 AM »
The claim I'm most skeptical of is that 'desireable' neighborhoods which ahve appreciated considerably over the past decade are somehow less likely to decrease as much in value in future busts ("During the next housing burst, the less desirable locations are going to take a bigger hit on rent and home values, in my opinion. ")

Just tossing my own anecdote in with the others... when I was in graduate school I was living (and renting out a room) in one of these highly desirable towns with a large population of college students which had seen home-prices increase 6-10%/year for about two decades.  Long story short, those home prices were the ones that went into the toilet, while the 'shittier, less desirable' neighborhoods further away barely fell at all.  And in retrospect it makes a lot of sense - when times were good people were willing to keep paying ever higher prices to live near the city center.  When the bottom fell out those that could moved away to the more affordable (but less desireable) locales, propping up their prices.  At one point our home was down 45% on paper, and I had to cut my room rate twice from $1500 down to $1100 to keep it occupied.

Maybe that was unique to where we were, maybe not.  Looking around I've learned that many cities have areas that were once the 'desireable' place to live, then went to pot, and now are slowly being re-gentrified now that times are good again.

Jon Bon

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #35 on: August 23, 2019, 09:18:02 AM »
I made an average salary of 41,600/year over the past 12 years and managed to turn 50K into 700K of equity with very little effort besides initial rehab.

This is gold.

Yup because it is just that easy!


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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #36 on: August 23, 2019, 09:45:44 AM »
I made an average salary of 41,600/year over the past 12 years and managed to turn 50K into 700K of equity with very little effort besides initial rehab.

This is gold.

Yup because it is just that easy!


*sarcasm*

Exactly.  I go to Vegas for climbing pretty annually.  Everytime I go I allocate $20 to gambling.  Over the last 4 yrs, I have turned the $20 into $189, 20 into 47, 20 into 28, and 20 into 131.  Extrapolating that out, I should just spend more time and more money in Vegas and I would be a billionaire. 

clarkfan1979

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #37 on: August 23, 2019, 10:33:38 AM »
Now we're just off in the weeds. Nobody is saying you did anything wrong or that your investment choices didn't work out great. You don't have to get defensive or humble-brag about your finances to justify yourself to us.

We're saying your argument against the 1% rule, based entirely on you personal anecdote, is not useful.

Luck is different than planning/skill. It's ok, I got lucky during the same time period, when I was also in a PhD program and making next to no money. A good half of my net worth is based on buying RE during that time period (mostly primary residences) that appreciated like crazy. Good stuff. But it doesn't mean the *deliberate* investor shouldn't care about the various (1%/50%, etc) metrics we have available to analyze rental properties. Do you want to trust that appreciation will continue as it has for another decade? I guess it's possible but I sure as hell wouldn't buy your place today to rent out.

-W

I agree that we are getting off topic. There are many different ways to make money in real estate. Over the past 4 years on this forum, it seems to me like the 1% rule has become the "only way." I'm just trying to balance it out.

If you can get the 1% rule in a good location, go for it. I did that once. However, based on my personal experience, I see newbies venturing out to very undesirable locations to try to get the 1% rule because they can only get 0.7% or 0.8% in much better location.



I made an average salary of 41,600/year over the past 12 years and managed to turn 50K into 700K of equity with very little effort besides initial rehab.

This is gold.

Yup because it is just that easy!

*sarcasm*




One of my initial points is that more desirable locations provide better quality tenants with much less effort. Yes, you are farther away from the 1% rule, but it's much less work. I think there are quite a few people who agree with me on this point. I don't understand the need for sarcasm.


I apologize if I came off as being elitist. I'm trying to do the opposite. I'm trying to share ideas in hopes that other people can benefit.

Here are some quick numbers

House #1
182K purchase in May 2007. 10K of initial rehab.
PITI= $950/month
2007 rent was $1250/month
2019 rent was $2500/month
2019 home value 390K
Great location.
Within 0.5 miles of Colorado State University
Enrollment is 33,000 and projected to be about 1% going forward


House #2
95K purchase in Jan 2012. 16K of initial rehab
PITI = $675/month
2012 rent: 1250
2019 rent: 1850
2019 value 235K
Good location, but not great.
4.5 miles from Florida Gulf Coast University
Enrollment is 15,000 and expected to flat or minor decreases in next 5-10 years.
They have enough space for "phase 2", but that won't happen for another 10-15 years.

At intitial purchase, house #2 is much better on paper. House #2 meets the 1% rule, but the location isn't as good as house #1.

For house #1, there are no empty lots within 0.5 miles of campus to build additional single family homes. Maybe 2-3% of the lots are big enough to build a 2nd home on a lot with an existing home (including mine). They are building 3 story apartments within 0.5 miles of campus, but not single family homes. Students pay a premium to be in a single family home and be closer to campus. I rent my place for $2500/month because I'm 0.5 miles from campus and the football stadium. If you are 2 miles away, you are looking at 2,000/month for market rent for a similar house. My rental house is also within walking distance of popular bars/restaurants.

For house #2, there is a ton of buildable land within 4.5 miles of campus. The campus location is very non-traditional because the immediate neighborhood consists of 1-3 million dollar homes. You need to be at least 2.0 miles away from campus to get into single family homes that are close to the median house price for Fort Myers, FL (210K). Since 2016, developers have been building like crazy in the surrounding area. It's gotten to the point where my house value and rent are starting to decrease. In 2018 it was worth 250K and now it's worth 235K in 2019. Market rent also went down from 1850/month to 1750/month. I got lucky and my tenants re-newed the lease at the same price as last year of $1850/month. Next year I am expecting to get 1750/month. 

I got lucky with house #2 (Fort Myers) based on marketing timing. The Fort Myers house in 2007 was worth 250K. I bought it in 2012 after a major market correction for 95K. Fort Myers really took it on the chin during the housing crisis.

However, when i bought house #1 (Fort Collins) in 2007, it was not after a major market correction. It was more of a normal price in a normal market. It previously sold for 177K in 2001.   

There is a huge scarcity of land near house #1. This drives the price up (home value and rent). If you want to call it "luck" fine. I call it "economics" For house #2, the price is starting to go down because the the abundance of buildable land is now being developed. Equally, I do not call this "unlucky"

Here's my prediction. Although house #2 was much better at the point of purchase, house #1 is going to provide a better return over a 30 year horizon. I realize that I could be wrong, but this is my prediction.





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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #38 on: August 23, 2019, 10:54:53 AM »

I agree that we are getting off topic. There are many different ways to make money in real estate. Over the past 4 years on this forum, it seems to me like the 1% rule has become the "only way." I'm just trying to balance it out.

If you can get the 1% rule in a good location, go for it. I did that once. However, based on my personal experience, I see newbies venturing out to very undesirable locations to try to get the 1% rule because they can only get 0.7% or 0.8% in much better location.


Ok, but take a second to read over your subject again.  You are telling people who strive for 1% returns that they will be 'hurt' in terms of building wealth.  Are there areas where its difficult to find a good rental that meets this criteria?  sure.  Is it the only way of making money in RE?  absolutely not.  But broadly speaking a person will be well served seeking out such properties.

No one is contesting that you've built up your NW through an alternative strategy.  I'm genuinely happy it's worked out for you.  There is some discussion on what degree that was on luck or skill.  But you're basically saying we are hurting ourselves by using this filter, which I strongly disagree with.  How you frame the discussion determines what kind of responses you are likely to get.

Papa bear

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #39 on: August 23, 2019, 11:10:04 AM »
Yes, there are a LOT of ways to make money in real estate.  No one is disputing that.  You did a great job making money yourself.  It looks like you found underperforming assets, did some work on the front end to increase value, and reaped the rewards of increased rents and phenomenal appreciation. 

We started piling on because your click bait opening statement is that the 1% rule hurts you in building wealth and that the best option is to purchase your house #1 example.  Given your examples of properties purchased, your return has been better on the Florida property.  You know, the one that monthly rents were better than 1% of the purchase price + rehab costs.  The property doubled in value over 7 years, while Fort Collins took more than 12.  This contradicts your opening assertion.  Going forward, to compare #1 and #2 is speculating on potential appreciation. You are making an educated guess.  So, in response to your opening argument, the 1% rule properties did NOT hurt you in building wealth.  I even found a property in Fort Collins that would have netted phenomenal returns that would have been damn close the 1% rule at the time.

When I was lurking on these forums back in 2012 through my join date, people were talking about the 2% rule. It's already been adjusted in HALF. The reason why the 1% rule has become so much more popular on these forums over the past few years is that appreciation has skyrocketed.  (Hell, one of the posters on the boards now even had thread awhile back to get the discussion going about if the 1% rule is dead)  Real estate is  back to the mid 2000's mentality that real estate must always go up.  You've lived through this.  We've all been through this show before.  Buying a .7 or .8% place isn't necessarily a bad investment, you can make money.  The biggest issues we come across on these boards are the .3-.5% properties, especially those people who want to take a heavily appreciated primary residence and then rent it out.  Those people should take their tax free gains and RUN with them.  People are speculating on ever increasing and greater than wage inflation growth.   It's unsustainable.  I'm not sure anyone on here has advocated that you go out to podunkville rural town with one manufacturing plant and buy a bunch of risky junk just for the rents.

Here's how you should be making money TODAY in real estate. 

Go out and buy the crappiest house in the nicest neighborhood.  Move in to it and fix it up.  Sell it for a tax free profit after enjoying your home for 2 years! (Slow Flip)
Buy a crappy house that needs some cosmetic work done.  Do the work FAST and flip it for a profit!  (Regular Flip)
Or buy a house that's going to cash flow.  Whether you have to buy a place and rehab, or buy a place that already has it done.  (Cash on cash return rental)  Just don't expect it to cashflow when rents are $9 more than PITI and HOA fees.  Take the 1% rule as your back of napkin math to evaluate the property. 




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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #40 on: August 23, 2019, 11:45:54 AM »
Buying a .7 or .8% place isn't necessarily a bad investment, you can make money.  The biggest issues we come across on these boards are the .3-.5% properties, especially those people who want to take a heavily appreciated primary residence and then rent it out.  Those people should take their tax free gains and RUN with them.  People are speculating on ever increasing and greater than wage inflation growth.   It's unsustainable.  I'm not sure anyone on here has advocated that you go out to podunkville rural town with one manufacturing plant and buy a bunch of risky junk just for the rents. 

I was recently shopping for a personal home in our area, but I just really couldn't justify the price to myself.

We decided to rent a place for 1500/month. The house prices were in the range of 250-350k for something equivalent. Even with all the benefits of home ownership, can I justify buying a house at a .4-.6% rent equivalent? Even staying here for 5 years, it's just not a smart deal. The housing market is plump and pushing its limits in a lot of markets. Outside of a few markets or niches, I just don't see RE providing good returns in the next 3-10 years.

What is the risk of RE value being eaten up by inflation in the next 10 years?

clarkfan1979

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #41 on: August 23, 2019, 12:13:20 PM »
Yes, there are a LOT of ways to make money in real estate.  No one is disputing that.  You did a great job making money yourself.  It looks like you found underperforming assets, did some work on the front end to increase value, and reaped the rewards of increased rents and phenomenal appreciation. 

We started piling on because your click bait opening statement is that the 1% rule hurts you in building wealth and that the best option is to purchase your house #1 example.  Given your examples of properties purchased, your return has been better on the Florida property.  You know, the one that monthly rents were better than 1% of the purchase price + rehab costs.  The property doubled in value over 7 years, while Fort Collins took more than 12.  This contradicts your opening assertion.  Going forward, to compare #1 and #2 is speculating on potential appreciation. You are making an educated guess.  So, in response to your opening argument, the 1% rule properties did NOT hurt you in building wealth.  I even found a property in Fort Collins that would have netted phenomenal returns that would have been damn close the 1% rule at the time.

When I was lurking on these forums back in 2012 through my join date, people were talking about the 2% rule. It's already been adjusted in HALF. The reason why the 1% rule has become so much more popular on these forums over the past few years is that appreciation has skyrocketed.  (Hell, one of the posters on the boards now even had thread awhile back to get the discussion going about if the 1% rule is dead)  Real estate is  back to the mid 2000's mentality that real estate must always go up.  You've lived through this.  We've all been through this show before.  Buying a .7 or .8% place isn't necessarily a bad investment, you can make money.  The biggest issues we come across on these boards are the .3-.5% properties, especially those people who want to take a heavily appreciated primary residence and then rent it out.  Those people should take their tax free gains and RUN with them.  People are speculating on ever increasing and greater than wage inflation growth.   It's unsustainable.  I'm not sure anyone on here has advocated that you go out to podunkville rural town with one manufacturing plant and buy a bunch of risky junk just for the rents.

Here's how you should be making money TODAY in real estate. 

Go out and buy the crappiest house in the nicest neighborhood.  Move in to it and fix it up.  Sell it for a tax free profit after enjoying your home for 2 years! (Slow Flip)
Buy a crappy house that needs some cosmetic work done.  Do the work FAST and flip it for a profit!  (Regular Flip)
Or buy a house that's going to cash flow.  Whether you have to buy a place and rehab, or buy a place that already has it done.  (Cash on cash return rental)  Just don't expect it to cashflow when rents are $9 more than PITI and HOA fees.  Take the 1% rule as your back of napkin math to evaluate the property.


All very good points.

Yes, the FL house met the 1% rule and it worked out. However, that was 2012 when many people were hitting the 1% rule. My main point (which I have done a poor job) is that trying to hit the 1% rule in 2019 will hurt you in building wealth because it will (1) push you into a less desirable neighborhood or opportunity cost waiting for a 1% deal.

A seasoned investor will know when they are in bad neighborhood and understand the risk. However, newbies will be signing documents as long as the deal pencils out at 1%. That will potentially crush them in building wealth. The founder of bigger pockets openly admits that is what happened to him. I think he was actually getting 2% deals because they were multi-family. 

It might take another 5-10 years to get another 1% deal. Maybe that's not a big deal for someone who already has 1 or 2 rentals. However, for someone that is ready to get started, taking a 0.7% or 0.8% deal today might be better in building wealth, instead of waiting for a 1% deal.
 


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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #42 on: August 23, 2019, 12:48:01 PM »
Yes, the FL house met the 1% rule and it worked out. However, that was 2012 when many people were hitting the 1% rule. My main point (which I have done a poor job) is that trying to hit the 1% rule in 2019 will hurt you in building wealth because it will (1) push you into a less desirable neighborhood or opportunity cost waiting for a 1% deal.


This may be true for some markets, particularly ones that have experienced substantial run-ups in the last several years.  It is not true everywhere.  In our last two areas it is still relatively easy to find properties that hit the 1% rule and are in the most desirable of neighborhoods.  A plethora of students keeps the rental market strong, and there simply hasn't been the growth (either in population or wages) to drive home prices up.  My neighborhood has seen appreciation of about 2% per year for the last five years, so essentially flat after inflation.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #43 on: August 23, 2019, 01:03:16 PM »
Yes, the FL house met the 1% rule and it worked out. However, that was 2012 when many people were hitting the 1% rule. My main point (which I have done a poor job) is that trying to hit the 1% rule in 2019 will hurt you in building wealth because it will (1) push you into a less desirable neighborhood or opportunity cost waiting for a 1% deal.


This may be true for some markets, particularly ones that have experienced substantial run-ups in the last several years.  It is not true everywhere.  In our last two areas it is still relatively easy to find properties that hit the 1% rule and are in the most desirable of neighborhoods.  A plethora of students keeps the rental market strong, and there simply hasn't been the growth (either in population or wages) to drive home prices up.  My neighborhood has seen appreciation of about 2% per year for the last five years, so essentially flat after inflation.

Where is that?

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #44 on: August 23, 2019, 01:08:44 PM »
"It might take another 5-10 years to get another 1% deal. Maybe that's not a big deal for someone who already has 1 or 2 rentals. However, for someone that is ready to get started, taking a 0.7% or 0.8% deal today might be better in building wealth, instead of waiting for a 1% deal. "

Or they could lose their shirts when both rents and values decline as the cycle enters a downturn.  I haven't bought anything since 2012.  I would not buy anything in my markets today.  There are times when doing nothing is the best option.

If you can find a value add niche in your local market, go for it.  Otherwise, especially if you are just starting out, hold on to your cash.
 

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #45 on: August 23, 2019, 01:15:00 PM »

2007 rent was $1250/month


I was paying $1600/month for a 4 bd/2 bt/2 garage house in FOCO in 2005, though this house was about 1.5 miles from CSU.  Maybe I was overpaying, maybe you left $350 on the table, I don't know.

My reading of Clark's posts is that the 1% or 2% rule is not the end all be all of real estate investing, which most here have acknowledged.  I assume he did research and saw that FOCO had a historically strong RE market, and based his decision to buy accordingly.  Not much different than other investing decisions.  I'm not sure why everyone dumps on his his ideas, then acknowledges that his ideas are one of the (riskier) ways to make money in real estate.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #46 on: August 23, 2019, 01:42:10 PM »
Yes, the FL house met the 1% rule and it worked out. However, that was 2012 when many people were hitting the 1% rule. My main point (which I have done a poor job) is that trying to hit the 1% rule in 2019 will hurt you in building wealth because it will (1) push you into a less desirable neighborhood or opportunity cost waiting for a 1% deal.


This may be true for some markets, particularly ones that have experienced substantial run-ups in the last several years.  It is not true everywhere.  In our last two areas it is still relatively easy to find properties that hit the 1% rule and are in the most desirable of neighborhoods.  A plethora of students keeps the rental market strong, and there simply hasn't been the growth (either in population or wages) to drive home prices up.  My neighborhood has seen appreciation of about 2% per year for the last five years, so essentially flat after inflation.

Where is that?

Most of  New England, excluding Portland, Boston and and maybe a couple of other metropolitan areas. All of New England has had below the national average population growth over the last several years, with Vermont, NH and Maine negative or effectively zero.  Most of the large towns/small cities are struggling to attract younger people that are your classic first-time home buyers (with many younger people moving to the aforementioned Portland or Boston). Maine now has the oldest population in the nation.

In case you were wondering, the states where population is increasing the fastest are almost all west of the Mississippi (plus Florida and the Carolinas). Not coincidentially that's where most of the real-estate markets are that have had large year-over-year gains.

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #47 on: August 23, 2019, 02:10:13 PM »
Yes, the FL house met the 1% rule and it worked out. However, that was 2012 when many people were hitting the 1% rule. My main point (which I have done a poor job) is that trying to hit the 1% rule in 2019 will hurt you in building wealth because it will (1) push you into a less desirable neighborhood or opportunity cost waiting for a 1% deal.


This may be true for some markets, particularly ones that have experienced substantial run-ups in the last several years.  It is not true everywhere.  In our last two areas it is still relatively easy to find properties that hit the 1% rule and are in the most desirable of neighborhoods.  A plethora of students keeps the rental market strong, and there simply hasn't been the growth (either in population or wages) to drive home prices up.  My neighborhood has seen appreciation of about 2% per year for the last five years, so essentially flat after inflation.

Where is that?

Most of  New England, excluding Portland, Boston and and maybe a couple of other metropolitan areas. All of New England has had below the national average population growth over the last several years, with Vermont, NH and Maine negative or effectively zero.  Most of the large towns/small cities are struggling to attract younger people that are your classic first-time home buyers (with many younger people moving to the aforementioned Portland or Boston). Maine now has the oldest population in the nation.

In case you were wondering, the states where population is increasing the fastest are almost all west of the Mississippi (plus Florida and the Carolinas). Not coincidentially that's where most of the real-estate markets are that have had large year-over-year gains.

What he/she is stating is that if you go to cities with no growth or population declining, you can still find 1% or maybe even 2% deals.  What isn't being said is that without growth, the longterm appreciation of rent or property value will probably mirror the population. 

clarkfan1979

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Re: quality over quantity and why the 1% rule hurts you in building wealth
« Reply #48 on: August 25, 2019, 08:14:25 PM »

2007 rent was $1250/month


I was paying $1600/month for a 4 bd/2 bt/2 garage house in FOCO in 2005, though this house was about 1.5 miles from CSU.  Maybe I was overpaying, maybe you left $350 on the table, I don't know.

My reading of Clark's posts is that the 1% or 2% rule is not the end all be all of real estate investing, which most here have acknowledged.  I assume he did research and saw that FOCO had a historically strong RE market, and based his decision to buy accordingly.  Not much different than other investing decisions.  I'm not sure why everyone dumps on his his ideas, then acknowledges that his ideas are one of the (riskier) ways to make money in real estate.

Maybe I left $350 on the table, by only asking $1250. At the time, I was actually living in the property and renting $300-$350 per room. I thought I was at market rent, but I could have been wrong. I'm guessing the entire house would have rented for $1250/month in 2007.

$1600 seems kind of high for that time period being 1.5 miles from campus. Where you anywhere close to the "old town" area. Where any utilities included? Was it new construction? My house is 0.5 miles directly west in the "Avery Park" neighborhood. It's also now being called "campus west." Most of the single family homes were built in the late 1960's and early 1970's.

Here's a fun fact. I rented a room to a kid for $350/month in 2007. He paid $25/month extra for a spot to park in the garage. I got an opportunity to meet his dad. His dad graduated from CSU in 1972. He lived in the same neighborhood and rented a basement room for $35/month. I think it's funny that the rent increased from $35/month to $350/month, after 35 years. 

This means that from 1972 to 2007, rent increased at a rate of 6.8%.

If rent doubled from $1250 to $2500 from 2007 to 2019, rent increased at a rate of 5.95%.

My holding period is actually worse than previous performance.