Is it just me, or does this thread smell like 2005-06 all over again?
Ok, well disregarding the 1% rule, which I should be able to easily achieve in a year or two since property values are likely to increase (which currently the market shows it will), does the math look feasible?
As I understand the 1% rule, the value of your property is in the denominator of the equation. This means that if your property values rise (good for you), then your percentage will drop even lower. The only way you can boost the percentage is to raise your rents (good for you) or lower your property values (not so good).
Here's another real-life example of a sucky version of the 1% rule: I charge $2900/month rent for a 4BR/2BA SFH. "Unfortunately" on Oahu the median value of a SFH is $600K. The percentage works out to $2900/$600,000 = 0.48%. If I raise the rent to $3000/month then I'm up to 0.5%. If I raise it again then nobody will rent the place. If I'd done this at the pit of our last real estate recession then I would've achieved 1% because the property would've been worth just $300K. Of course my tenants would have made me drop the rent or they would have moved out, so realistically I'll never reach the ratio of the 1% rule.
On the other hand, if I sold the place and paid all my taxes then I'd have (in round numbers) $400,000. Assuming that half of the gross rent is eaten up with taxes and maintenance/repair costs, I still clear $17,400/year. That's a 4.35% APY on the $400,000 after-tax capital I'd get out of the property. It looks great compared to CDs, but rental properties tend to be more work than CDs (and CD insurance fees are paid by the bank, not by me).
So estimate your net annual rental income (perhaps using the 50% rule) and figure out how much yield you're getting on your investment. You could either use your cash that you have into the properties now (both the purchase price as well as the improvements) or the cash that you'd have after you sell the properties and pay your taxes (federal, state, local capital gains, federal & state depreciation recapture, and AMT). Either way I suspect that you're working harder for your rental yield than you would be in a CD-- and with higher potential risk to both your principal and your yield. You'd probably be making way less than the average annual compounded return of a passive index equity fund.
This is what people mean when they tell you that your rental properties suck. I appreciate this because I've put up with this similar situation for most of the last 25 years, and mainly for family (non-financial) reasons. If I was trying to maximize the yield on the capital invested in our rental property then I'd probably be better off selling it. Instead I accept the lower yield as a way of diversifying my portfolio asset allocation, which lets me
rationalize find other extremely risky ways to invest my money. At least the cash that I have locked up in dead equity keeps me from doing stupid things with that money, and we've had a good run of tenants from our three local military bases.
Yeah, I know, property values in the DC area have been going straight up since Washington was a private. However you are still taking outsize risks with little (or no) margin for error, and your plan is essentially hoping that the rise in property values continues until you've sold the place. That's not investing for rental income-- that's speculation.
In 2006 I watched a guy in our neighborhood buy four properties with mortgages and hard-money loans. He immediately signed up for home equity lines of credit and started making his payments from his HELOCs, along with whatever month-to-month rentals he could pull in. Property values had been going up for years, so he was confident that he could keep juggling until he reached the peak of the market. Unfortunately he ran out of cash in 2009 and the peak didn't come back until 2014.