I'm not sure if the is the correct place to ask this question, but since I saw it discussed on this thread I will just go ahead and ask it here.
I want to make sure I understand the 1% and 50% rule, and what that would mean in regards to ROI.
If your monthly rent was 1% of purchase price then if you purchased the home for cash you would have a 12% return before expenses? Then using the 50% expense rule you would then expect your final ROI to be 6%? Please let me know if this correct. If this is how it works it makes complete sense that if you are buying cash you really need to be using the 2% rule, but using the 1% rule at current interest rates could still deliver a good ROI if you leverage money.
Correct. I'd actually estimate, in my experience, a 1% rule to return 4-6%, typically, and a 2% rule property to return 10-12% (just straight cash on cash, ignoring the 3 other potential methods of return, and any extra income it may generate). And cheap leverage can up that somewhat, but obviously it'll up it more with a 2% property, because of the spread of what you're earning (10-12%) and what you're paying (5%ish for an investment property). With a 1% rule property, it probably won't boost your returns that much since your return is only slightly above your borrowing rate.
But yes, that's why I don't buy any properties that only hit 1% - the return is just not there for the work, and that point I'd just buy an index fund.
And, from what i've seen, and i'm NOT an expert at all, but most houses that meet the 1% rule are fairly nice) as opposed to say certain houses in a 2% area which could be "slums"
I feel like a lot of people think this way, but it's not necessarily the case. It totally depends on your market. I've got some pretty nice 2% rule properties, and seen some pretty shitty sub-1% rule properties.
Heck, for those of you in a market that doesn't hit the 1% rule: can't you think of some terrible slum like properties in your area that don't hit the 1% rule? Certainly those exist in some markets. It's not the case that a property is nice just because it's sub-1%. Ditto the opposite. It's not the case that a home is terrible just because it rents for 2% of the purchase price monthly. It just depends on the market and what's available there.