Author Topic: This is why I do not like the 1% rule  (Read 5120 times)

clarkfan1979

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This is why I do not like the 1% rule
« on: November 20, 2020, 07:29:45 AM »
There are many different ways to make money in real estate. I am not advocating that my path is the "only path" or the "best path". I am simply advocating that it is "a path" I really struggle when people say that they won't even look at a deal if it doesn't meet the 1% rule. I think that is really short-sighted. If you want cash flow to quit your job, fine. However, if you are looking to build wealth, the 1% rule is not a very good metric.

If you want to build wealth, you should be buying assets that are highly valued. Warren Buffet attributes his success to his partner Charlie Munger for helping him change his investing philosophy. Instead of trying to get a "great price" on a "fair company", Charlie taught me to focus on getting a "fair price" on a "great company".

I purchased a primary home in June 2018 for 603K. I put in 50K of repairs and 7K of furniture. My mortgage is $2675/month with a rate of 4.5%. It's now a rental that gets $4450/month in rent. After GE tax ($180), utilities ($120), vacancy ($225) and repairs ($250) I get around $1,000/month of cash flow. I do get $700/month in principal pay down, but this deal is still very short of the 1% rule. Most people would tell me that this rental sucks, right?

https://www.bizjournals.com/pacific/news/2020/11/06/median-home-price-on-kauai-jumps-45-sales-up-37.html


« Last Edit: November 20, 2020, 07:45:38 AM by clarkfan1979 »

theoverlook

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Re: This is why I do not like the 1% rule
« Reply #1 on: November 20, 2020, 08:00:46 AM »
There are many different ways to make money in real estate. I am not advocating that my path is the "only path" or the "best path". I am simply advocating that it is "a path" I really struggle when people say that they won't even look at a deal if it doesn't meet the 1% rule. I think that is really short-sighted. If you want cash flow to quit your job, fine. However, if you are looking to build wealth, the 1% rule is not a very good metric.


But just like you, they're likely not saying it's the "only path," they're just saying it's their path. There's some irony in saying you allow that there are other paths but saying that other paths are really short-sighted.

For me, a less than 1% rule house just isn't worth the risk compared to the equivalent or higher return you get in the stock market. Disclosure, I own zero rental houses and only commercial property. But I say the same thing for commercial properties - I would not buy one if it didn't significantly beat the return from the stock market and that return is difficult to reach without meeting the 1% rule.

I do agree that a good property is much better to own than a fair property but your return is typically lower. Not always of course!

Paper Chaser

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Re: This is why I do not like the 1% rule
« Reply #2 on: November 20, 2020, 08:01:45 AM »
The thing is, the owner has zero control over appreciation. With a 1% property an owner can more or less know what their return will be and any appreciation is a bonus. Counting on an individual property to appreciate is a lot like picking an individual stock and hoping that its value climbs. It's just speculation whether the asset is a single stock or a single property.

Is 'buy a property and hope' a repeatable investment strategy, or is it just good luck on the part of the investor? The 1% rule is repeatable and if anything just acts as a multiplier if you do get lucky with appreciation.

lhamo

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Re: This is why I do not like the 1% rule
« Reply #3 on: November 20, 2020, 12:21:27 PM »
But you didn't originally buy that property to function exclusively as a rental -- you were planning to (and did) live in it as a primary residence. 

Given the scarcity of good properties in HI, I would likely hang onto one like yours too, even if it doesn't meet the 1% rule.  Especially if I thought there was any chance I might want to move back at some point.

maizefolk

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Re: This is why I do not like the 1% rule
« Reply #4 on: November 20, 2020, 12:38:26 PM »
The thing is, the owner has zero control over appreciation. With a 1% property an owner can more or less know what their return will be and any appreciation is a bonus. Counting on an individual property to appreciate is a lot like picking an individual stock and hoping that its value climbs. It's just speculation whether the asset is a single stock or a single property.

I think this is akin to people who argue for buying stocks only at lower P/E ratios. In isolation, it's completely true and I completely agree.

All things being equal, a property that satisfies the 1% rule is going to be a superior investment to one which fails to satisfy the rule. Just like, all things being equal, a stock that trades at a P/E ratio of 10 is superior to one which trades at a P/E ratio of 30. But in both cases, the price:rent ratio or price:earnings ratio is telling you that all things are not going to be equal between the two investments.

If two properties rent for different proportions of their purchase price, it is because there are also other differences between them. A stock with a lower P/E ratio may have a big tranche of debt coming due, or be losing market share to a competitor, or facing headwinds from increasing labor or other input costs. A property which satisfies the 1% rule may be located in a region with a shrinking population (much of the industrial midwest) where the property may depreciate over time. Or the may be a lower end property where turnover is more common or more frequent/more expensive repairs are required.

That doesn't mean that all properties are equally good investments (I don't believe in the efficient market hypothesis when it comes to real estate). But it does mean people have to weigh trade offs related to the reasons some properties satisfy the 1% rule while others do not when they are deciding which properties make sense as investments and which ones do not.

norajean

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Re: This is why I do not like the 1% rule
« Reply #5 on: November 20, 2020, 12:58:37 PM »
If you had followed the 1% rule you would simply be seeing higher cash flow than you are now, either $6000 in gross rent or a 30% cheaper purchase price. You went another way which is less profitable.

waltworks

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Re: This is why I do not like the 1% rule
« Reply #6 on: November 20, 2020, 01:12:42 PM »
It sucks ($250 a month is no way paying for your maintenance/Capex in HI, lol - especially if high end and furnished, you're including zero for management, etc) and it's also super risky. I have a feeling you haven't been through a big RE bust or major maintenance problem yet. It'll happen sooner or later.

You also left out property taxes, yes? I don't know what they are on Kauai (quick google says it might be ~9%!) but on Oahu they are *steep* for out of state owners.

But so far you're doing ok, though - good work. Come back and let us know how it's going in 20 years.

-W
« Last Edit: November 20, 2020, 01:29:51 PM by waltworks »

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #7 on: November 20, 2020, 01:34:19 PM »
But you didn't originally buy that property to function exclusively as a rental -- you were planning to (and did) live in it as a primary residence. 

Given the scarcity of good properties in HI, I would likely hang onto one like yours too, even if it doesn't meet the 1% rule.  Especially if I thought there was any chance I might want to move back at some point.

Yes, you are correct that I originally purchased the house as a primary residence. However, 16 months ago (August 2019), I was faced with the decision to sell or rent. Because the house would sell for 800K or rent for $4450/month, the 1% fans would make a very strong argument to sell. I never asked for an opinion on MMM because I was pretty sure of the answer that I would get. Yes, my cash flow is not ideal, but I got 100K-150K of appreciation over the past 16 months.

Let's not forget that Hawaii has the lowest property taxes in the nation, which the 1% rule ignores. I am originally from Lake County, IL which averages 3% on property taxes. I can show you a deals in Lake County, IL that meet the 1% rule but cash flow less because the property taxes are so high.

If you had followed the 1% rule you would simply be seeing higher cash flow than you are now, either $6000 in gross rent or a 30% cheaper purchase price. You went another way which is less profitable.

If you limit yourself to 1% deals you are going to remove yourself from appreciation markets. If that's your comfort zone, fine. However, to say that profits are less in appreciation markets would be incorrect. It would make more sense to say that the appreciation was due to luck. However, pretending like the appreciation doesn't exist is ignoring reality.

Big picture, 1% deals are probably good for beginners. However, I think it's sad when beginners want to get started but they put it off for like 5 years because they keep on searching for a 1% deal that never happens. Be conservative on your first deal because you will make mistakes. However, you do not have to wait for a 1% deal to get started. I'm still waiting myself.
 

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #8 on: November 20, 2020, 01:58:12 PM »
Clarkfan,

We all know what you are trying to say, but your method or "proof" just isn't convincing.

Your total cost was 660k plus major time and effort. Isn't this also a main home plus an in-law? So essentially you are managing 2 doors as well. Then you pay for the utility, GE tax (something I had to google), vacancy (wayyyyy too low), and maintenance (low imo) and waltworks is right, where is the property tax and management fees? All for $4450/month is not something that a lot of us would jump on. Not only that, this was you primary, so you purchased it knowing it wouldn't make the best rental. But now you are patting yourself on the back because it just happened to appreciate?

With all of that said, I really like how maizefolk summarized it. Not all 1% or .5% or whatever are created equal. I am in the Bay Area and we don't have anything close to 1%. However, because all other carrying costs are so marginal compared to the purchase price, our math is different. And yes, appreciation is a reality here, but I still won't factor that in my future purchase(s).   

Edit: If you don't like the 1% rule. What would be your "rule" in a sentence or two?


maizefolk

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Re: This is why I do not like the 1% rule
« Reply #9 on: November 20, 2020, 02:08:34 PM »
Not all 1% or .5% or whatever are created equal. I am in the Bay Area and we don't have anything close to 1%. However, because all other carrying costs are so marginal compared to the purchase price, our math is different. And yes, appreciation is a reality here, but I still won't factor that in my future purchase(s).   

This is something I'm be interested in learning more about because one can make an intuitive argument either way. In a market where the price of houses is 4x as high, does it really make sense that one needs to allow 4x as much for maintenance and upkeep of the house itself?

The argument for it being 4x as high in a city where the same house is worth 4x as much is that in the expensive market the people you are hiring to do repairs need to charge more to make their own rent. But on the other hand at least in a lot of other fields I know that the salary differential for the same job between, say, Detroit and San Francisco, is much less than the difference in rental rates or property values.

Goldielocks

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Re: This is why I do not like the 1% rule
« Reply #10 on: November 20, 2020, 02:09:46 PM »
There are many different ways to make money in real estate. I am not advocating that my path is the "only path" or the "best path". I am simply advocating that it is "a path" I really struggle when people say that they won't even look at a deal if it doesn't meet the 1% rule. I think that is really short-sighted. If you want cash flow to quit your job, fine. However, if you are looking to build wealth, the 1% rule is not a very good metric.

If you want to build wealth, you should be buying assets that are highly valued. Warren Buffet attributes his success to his partner Charlie Munger for helping him change his investing philosophy. Instead of trying to get a "great price" on a "fair company", Charlie taught me to focus on getting a "fair price" on a "great company".

I purchased a primary home in June 2018 for 603K. I put in 50K of repairs and 7K of furniture. My mortgage is $2675/month with a rate of 4.5%. It's now a rental that gets $4450/month in rent. After GE tax ($180), utilities ($120), vacancy ($225) and repairs ($250) I get around $1,000/month of cash flow. I do get $700/month in principal pay down, but this deal is still very short of the 1% rule. Most people would tell me that this rental sucks, right?

https://www.bizjournals.com/pacific/news/2020/11/06/median-home-price-on-kauai-jumps-45-sales-up-37.html


I looked into rentals quite a bit, as I owned 2 of them at one point.  The 1% works great for lower capital cost properties with a much higher % of repair and vacancy costs, overall.  Once you get into the land value of homes being very high, some of your gains can come from the gradual increase in home value over time, lowering the 1% rule.   This means that you need to be prepared to sell and get out when the values spike, then get back in later when prices stagnate.  At MMM we don't generally like market timing, and a rental is fairly high-work to sell. 

I think that in most markets a person who looks for a long time can eventually find a property that will pay out well, if managed well.  Sometimes they are very hard to find.

With high value property (land value is high), lower turn over with less vacancy and repairs, you can break even at around 0.5% or 0.6%... if you assume the home will increase at the rate of inflation or just above (average rate).  BUT, that does not pay me anything extra for my time to get it rented, time for repairs, to do my taxes, etc.

Your rate of 0.67% is not bad at all.
Take a look:

Opportunity Cost: $660k invested (let's assume no mortgage) x 5% a year net of inflation (average stock market) = $33k/yr = $2,750/mo

Income:  $4450/mo
Your costs monthly: $775 + Property tax of I assume $425/mo = $1200/mo
NET: $3250

Based on this, you are getting $500/mo extra for your business compared to the stock market, or 1% better than long term average returns.
That 1% will pay for the selling costs after 6 years. AND If you keep the property a longer time, then the resale costs as a % will be lower.

I note that your maintenance costs are very very very very low for a rental that is vacant one month every 2 years, on what I assume is a SFR or a SFR with a secondary suite.   This $3k/yr is the bare minimum of repairs just for the house, with zero replacement costs, and the rental turn over costs (paint, occasional new carpet or appliance, advertising) would be in addition, not to mention any tax accounting or minor legal help you need to run your business even with decent tenants.

Also - my insurance on a rental is close to $100/mo for a larger home, which may be missing from your numbers.  So, I would add in another $3000/yr minimum to your costs, likely more, for turn over maintenance costs, and insurance.

End of the day (using no mortgage, comparing to conservative stock market) -- you are netting at least $250 before tax on the rental, to pay for your labor, risk and talent. 

You are saving the property management fee of at least $350/mo by managing it yourself.  So if you had a management company, this rental certainly wouldn't pay, partly because they hire full trades to do all repairs and you will be replacing that toilet ball valve yourself in your scenario.


If your rental home value increases rapidly, especially if it increased faster than the stock market, you will "win" even more.

If you end up with a lot more vacancy than expected or a few major repair items, or need to sell the home, removing any real estate gains due to commission costs, you may or may not win. 

If you move away for an extended time and need to hire a property manager, you will not win.

Thoughts?

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #11 on: November 20, 2020, 02:26:53 PM »

It sucks ($250 a month is no way paying for your maintenance/Capex in HI, lol - especially if high end and furnished, you're including zero for management, etc) and it's also super risky. I have a feeling you haven't been through a big RE bust or major maintenance problem yet. It'll happen sooner or later.

You also left out property taxes, yes? I don't know what they are on Kauai (quick google says it might be ~9%!) but on Oahu they are *steep* for out of state owners.

But so far you're doing ok, though - good work. Come back and let us know how it's going in 20 years.

-W

Hey Walt, you are way off on the property taxes. Hawaii has the lowest property taxes in the nation. Even for out of state owners they are less than 1%. I think you are confusing the sales tax on vacation rentals, which is probably around 9%. Please stop with the quick google search. It's not helping.

My current property taxes are $1526/year. In July 2021, I will be losing the owner occupied resident discount and they will be increasing to $5837/year. However, before that happens, I am going to refinance from 4.5% to 3.25% and my PI will go down by $400, so my final PITI will be $2635/month.

The house is not a high end rental. For Kauai, it's at the median. According to the article I just shared, the median house price for Kauai is now 985,000. My house is probably worth 900,000 to 950,000, so I'm slightly below the median. The upstairs rents for $2900/month and the downstairs rents for $1600/month. Comparable vacation rentals closer to the beach rent for $9,000/month. Vacation rental rent is lower now due to COVID-19. However, I imagine I will be increasing the rent for my long term rental in the near future.

I lived on Kauai for four years and have two good friends that help me with my maintenance. They charge the same as labor in Colorado. My hot water heater was leaking last month. My friend fixed it for me for $100. The part cost $15 and he charged me $85 for one hour of labor. I also spent one full year total rehabbing the house. Maintenance costs are going to be lower than average. The house has no central heat or central air conditioning. There are less things to go wrong.

Yes, I do self-manage. My last two tenants rented "sight unseen" based on photos from the internet. I currently have a waiting list of retired folks that want to rent my house for 6 months at a time.  It's only two groups, but I am not even advertising. I am going to Kauai for 10 days in December with my wife and son for vacation. I will stop by the house on 3 separate days to do landscaping. Each day will be about 4 hours each. I do have long term plans to thin out the vegetation.

Yes, things can go wrong. That is why mortgage lenders force you to have 6 months of reserves in your checking account for each rental mortgage. For me, that minimum is $34,000. I think we currently have $42,000 in our checking.

I have been doing the landlord thing for 13 years. My numbers are below.

#1: May 2007: Purchase price of 182K+ 10K in repairs. Currently worth about 415K and rents for $2500/month. Appreciation of 6%/year.

#2 January 2012: Purchase price of 95K + 16k in repairs. Currently worth 250K and rents for $1850/month. Appreciation of 10%/year. 

#3 June 2018: Purchase price of 603K + 50K in repairs + 7K in furniture. Currently worth 900K and rents for $4450/month. 36% over 2 years.

#4 November 2019 (Primary Residence): Purchase price of 280K and zero repairs. Currently worth 310K. 10% over 1 year.

waltworks

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Re: This is why I do not like the 1% rule
« Reply #12 on: November 20, 2020, 03:15:28 PM »
Not all 1% or .5% or whatever are created equal. I am in the Bay Area and we don't have anything close to 1%. However, because all other carrying costs are so marginal compared to the purchase price, our math is different. And yes, appreciation is a reality here, but I still won't factor that in my future purchase(s).   

This is something I'm be interested in learning more about because one can make an intuitive argument either way. In a market where the price of houses is 4x as high, does it really make sense that one needs to allow 4x as much for maintenance and upkeep of the house itself?

The argument for it being 4x as high in a city where the same house is worth 4x as much is that in the expensive market the people you are hiring to do repairs need to charge more to make their own rent. But on the other hand at least in a lot of other fields I know that the salary differential for the same job between, say, Detroit and San Francisco, is much less than the difference in rental rates or property values.

It doesn't cost 4x as much to put a roof on in San Fran as it does in Iowa City, but it's probably double still just due to having to pay more for labor. There are also often more onerous/expensive permitting processes, taxes/fees, etc, etc for major repairs.

In HI, everything breaks/rots/gets a gecko in it and catches on fire pretty much constantly, so HI is it's own thing.

-W

waltworks

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Re: This is why I do not like the 1% rule
« Reply #13 on: November 20, 2020, 03:16:24 PM »
For reference, I bought a couple of primary residences, rented them until I sold them, and made out like a bandit too since 2008 or so. That doesn't mean I did a good job investing. It means I, just like OP, rode the crazy property appreciation wave of the last decade. IMO it's unlikely to continue that way, but who knows?

-W
« Last Edit: November 20, 2020, 03:25:03 PM by waltworks »

Paul der Krake

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Re: This is why I do not like the 1% rule
« Reply #14 on: November 20, 2020, 03:51:57 PM »
Oahu resident here.

I've been flip flopping between thinking the housing market is on the verge of collapse (every service worker laid off fleeing to the mainland once unemployment runs out), or on the verge of greatness (every mainlander with money suddenly wanting to work remotely from here).

But at least Oahu has some diversification in the form of military and some office jobs.

I'd be nervous having so much money at stake on a neighbor island that is entirely dependent on one industry.

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #15 on: November 20, 2020, 03:59:57 PM »
Clarkfan,

We all know what you are trying to say, but your method or "proof" just isn't convincing.

Your total cost was 660k plus major time and effort. Isn't this also a main home plus an in-law? So essentially you are managing 2 doors as well. Then you pay for the utility, GE tax (something I had to google), vacancy (wayyyyy too low), and maintenance (low imo) and waltworks is right, where is the property tax and management fees? All for $4450/month is not something that a lot of us would jump on. Not only that, this was you primary, so you purchased it knowing it wouldn't make the best rental. But now you are patting yourself on the back because it just happened to appreciate?

With all of that said, I really like how maizefolk summarized it. Not all 1% or .5% or whatever are created equal. I am in the Bay Area and we don't have anything close to 1%. However, because all other carrying costs are so marginal compared to the purchase price, our math is different. And yes, appreciation is a reality here, but I still won't factor that in my future purchase(s).   

Edit: If you don't like the 1% rule. What would be your "rule" in a sentence or two?

lilbenny34

I think your analysis is fair, but I think we need to iron out a few details. I addressed some of your concerns in my previous post. However, I will post again.

1) Yes, the house was originally a primary that did require much time and effort. However, after all the work was done and I was moving, I had to make the decision to sell or rent. I made the very unpopular decision to rent it. For this, I am patting myself on the back. I have done very little work over the past 16 months, in which it was a rental. My other 2 rentals have a very similar pattern. If I sold 16 months ago, I would have lost 100K of potential gains.

2) My vacancy is correct. I have two college rentals with 0% vacancy. My first rental in 2007 has had zero days of vacancy over the past 13 years. The other college rental has had only one day of vacancy since August 2015 and that was because my cleaning lady didn't work on Sundays. For the Kauai rental, when I put an ad on zillow and craigslist, I will get about 30 emails within 24 hours because affordable housing is at incredibly low supply. 

My rule is this, "Do not look for a great price on an average rental property, look for an average price on a great rental property." Did I mention that there were 9 offers on the Kauai house when I bought it? I was the 2nd highest offer. The first deal fell through and we go it. It was listed for 549K and we offered 603K. The median price for the neighborhood at the time was around 750K, so I was comfortable overbidding by 10%.

Since we are now in the weeds, the other thing that is driving the price up is that the federal government increased the lending limits for traditional financing. You can get a conventional loan up to 765,600 for Hawaii for 2020. With a purchase price of 957,000 and 20% down, you can get a loan of 765,600 at 2.75% for an owner occupied home. This would be a payment of 3,125/month for PI. A total of $1,371 would go toward principal on your first payment. You are paying $1,754 in interest. If you have a mother in law suite in the basement that pays you $1,600/month, you are left paying $154/month in interest. 

Mustache ride

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Re: This is why I do not like the 1% rule
« Reply #16 on: November 20, 2020, 05:25:01 PM »
So you're speculating on appreciation instead of cashflow. Nothing new to see here. If that's how you want to run your RE business go right ahead. We've had a fantastic market for 11 years, hard not to make money under these circumstances . I wish you well on your journey.

waltworks

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Re: This is why I do not like the 1% rule
« Reply #17 on: November 20, 2020, 05:27:54 PM »
Everywhere will turn into Australia at this rate!

-W

maizefolk

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Re: This is why I do not like the 1% rule
« Reply #18 on: November 20, 2020, 06:05:18 PM »
It doesn't cost 4x as much to put a roof on in San Fran as it does in Iowa City, but it's probably double still just due to having to pay more for labor. There are also often more onerous/expensive permitting processes, taxes/fees, etc, etc for major repairs.

In HI, everything breaks/rots/gets a gecko in it and catches on fire pretty much constantly, so HI is it's own thing.

-W

Makes sense. Thank you, waltworks.

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #19 on: November 20, 2020, 06:08:44 PM »
The thing is, the owner has zero control over appreciation. With a 1% property an owner can more or less know what their return will be and any appreciation is a bonus. Counting on an individual property to appreciate is a lot like picking an individual stock and hoping that its value climbs. It's just speculation whether the asset is a single stock or a single property.

I think this is akin to people who argue for buying stocks only at lower P/E ratios. In isolation, it's completely true and I completely agree.

All things being equal, a property that satisfies the 1% rule is going to be a superior investment to one which fails to satisfy the rule. Just like, all things being equal, a stock that trades at a P/E ratio of 10 is superior to one which trades at a P/E ratio of 30. But in both cases, the price:rent ratio or price:earnings ratio is telling you that all things are not going to be equal between the two investments.

If two properties rent for different proportions of their purchase price, it is because there are also other differences between them. A stock with a lower P/E ratio may have a big tranche of debt coming due, or be losing market share to a competitor, or facing headwinds from increasing labor or other input costs. A property which satisfies the 1% rule may be located in a region with a shrinking population (much of the industrial midwest) where the property may depreciate over time. Or the may be a lower end property where turnover is more common or more frequent/more expensive repairs are required.

That doesn't mean that all properties are equally good investments (I don't believe in the efficient market hypothesis when it comes to real estate). But it does mean people have to weigh trade offs related to the reasons some properties satisfy the 1% rule while others do not when they are deciding which properties make sense as investments and which ones do not.


Very thoughtful analysis. I really like comparison of real estate vs. stocks. Thank you for your contributions.

I'm a big fan of Ray Dalio and his philosophy on respectful disagreement. It's a very practical way to seek truth or what at least the consensus believes to be true. I've always operated in that manner but now someone else has validated my philosophy. In the past, the common explanation was "asshole" Well, I might still be an "asshole" but now I have more energy, purpose and direction. 

I am not married to the idea of appreciation. I seek whatever is true. However, appreciation has been my reality over the past 13 years. I do not think it will last forever. However, based on the current economy of QE and low mortgage rates, I'm planning on riding the appreciation train for another 12-18 months. After that, I will re-evaluate.

Everywhere will turn into Australia at this rate!

-W

This is less thoughtful and not very helpful.
« Last Edit: November 20, 2020, 06:19:21 PM by clarkfan1979 »

waltworks

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Re: This is why I do not like the 1% rule
« Reply #20 on: November 20, 2020, 07:28:03 PM »
You might want to read up on Australia and RE prices/gov't intervention in the market (which takes a somewhat different form there, just google "negative gearing" for a real mindf***), if you think that's not relevant to our situation now, or specifically to your appreciation play...

-W
« Last Edit: November 20, 2020, 07:32:46 PM by waltworks »

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #21 on: November 20, 2020, 08:31:48 PM »
You might want to read up on Australia and RE prices/gov't intervention in the market (which takes a somewhat different form there, just google "negative gearing" for a real mindf***), if you think that's not relevant to our situation now, or specifically to your appreciation play...

-W

Real estate trends are always changing and I will try my best to change with it. I am not married to any specific idea forever. I still get plenty of cash flow. I just don't get enough for the 1% rule.

You have been telling me since 2015 that I am going to lose my houses to foreclosure and you are going to buy my houses from the bank for pennies on the dollar. Every year it's the same story.

Your response 99% of the time is, "Short of the 1% rule, not enough money for cap ex, you are managing yourself and just gave yourself a job." Yeah, that is how 90% of us get started.

I would like to provide encouragement for the newbies that want to get started. My advice to you is to be aware of the 1% rule but do not follow it blindly. The banks will force you to show 6 months of mortgage reserves in order to close. Do not spend that on repairs. I would actually do 12 months of reserves for your first deal (after repairs) and then 6 months for each additional rental. Make sure you have the correct insurance. That will take care of any potential major losses. You don't have to wait to hit the 1% rule to get started. That day might never come.


Jon Bon

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Re: This is why I do not like the 1% rule
« Reply #22 on: November 20, 2020, 08:33:19 PM »
I feel like you posted this before. So far you have correctly speculated on real estate. Nice work, you are now rich!

You (and I) correctly timed the real estate market. I dont think either of us discovered some new, and novel RE strategy. I would image you know your local market pretty well and have an advantage there. However that is not exactly fair coin it as a "rule" considering Hawaii is a one of a kind market with nothing else like it in the states.

https://forum.mrmoneymustache.com/real-estate-and-landlording/quality-over-quantity-and-why-the-1-rule-hurts-you-in-building-wealth/msg2444775/#msg2444775

Jon Bon

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Re: This is why I do not like the 1% rule
« Reply #23 on: November 20, 2020, 08:37:50 PM »
You might want to read up on Australia and RE prices/gov't intervention in the market (which takes a somewhat different form there, just google "negative gearing" for a real mindf***), if you think that's not relevant to our situation now, or specifically to your appreciation play...

-W

Real estate trends are always changing and I will try my best to change with it. I am not married to any specific idea forever. I still get plenty of cash flow. I just don't get enough for the 1% rule.

You have been telling me since 2015 that I am going to lose my houses to foreclosure and you are going to buy my houses from the bank for pennies on the dollar. Every year it's the same story.

Your response 99% of the time is, "Short of the 1% rule, not enough money for cap ex, you are managing yourself and just gave yourself a job." Yeah, that is how 90% of us get started.

I would like to provide encouragement for the newbies that want to get started. My advice to you is to be aware of the 1% rule but do not follow it blindly. The banks will force you to show 6 months of mortgage reserves in order to close. Do not spend that on repairs. I would actually do 12 months of reserves for your first deal (after repairs) and then 6 months for each additional rental. Make sure you have the correct insurance. That will take care of any potential major losses. You don't have to wait to hit the 1% rule to get started. That day might never come.

I think this is why Walt, and I, and others disagree with you. Past performance has nothing to do with future results.

Clark, as I said before, you won the game, nice job. You are now wealthy and can enjoy life. If you personally get caught leaning the wrong way on a deal you will likely be fine. You have the reserves and the experience to get through it. Its the newbies that cannot come back from such at thing.

If the Return/Price ratio remains where it is, then yes that day may  never come for a RE investor. She would be better off investing in something else.




waltworks

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Re: This is why I do not like the 1% rule
« Reply #24 on: November 20, 2020, 08:48:35 PM »
You don't have to wait to hit the 1% rule to get started. That day might never come.

This is actually something I've wondered about. 1% rule properties existed in most times/markets during the "modern" (ie, Fannie/Freddie gov't subsidized mortgages) post-1930s era. They became really scarce in the last 5 years (and were also scarce from 2003-2008 or so), depending on your local market, though I can still find you a few in the upper midwest. In other words, the current situation is pretty unique, historically.

So the question is, will we see a regression to the mean, or is housing going to be *permanently* more expensive relative to incomes going forward? That would have some interesting consequences, for sure.

Then again, we've been through "this time is different" and "buy now or be priced out forever" before.

I'll just say I'm happy to have sold all my rentals, even if I forwent some appreciation money over the last few years. It makes me a little sick to my stomach to live in what is now, due to Covid madness, probably almost a $2 million house. This is not normal, at all. But that doesn't mean it won't be normal in the future, reality is weird.

IMO we'll eventually see housing go back to historically normal prices relative to incomes. When that will happen is anyone's guess, which is why I mentioned Australia.

-W

Paul der Krake

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Re: This is why I do not like the 1% rule
« Reply #25 on: November 20, 2020, 09:41:24 PM »
I donít see a compelling reason that houses should revert to historical multiples. The phenomenon isnít confined to the US, itís pretty much a trend across the developed world. In fact, some of the hot markets stateside look downright cheap compared to some other world metropolises. London, Hong Kong, etc.


Bloop Bloop Reloaded

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Re: This is why I do not like the 1% rule
« Reply #26 on: November 21, 2020, 12:13:37 AM »
Here in Melbourne you could barely find a single home that has a monthly rent of 0.5% of its price, let alone 1%.

The fact that homes in the US can qualify for the 1% rule makes me think that their capital value is woefully underpriced (or maybe Australian homes are overpriced).




Papa bear

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Re: This is why I do not like the 1% rule
« Reply #27 on: November 21, 2020, 05:51:52 AM »
Is it Groundhog Day? Are we rehashing this again with you?  Iíve seen this show before, you always argue against the 1% rule because your 4 rentals made some decent money.

The 1% rule works because math.  Speculating might work, or might not, because its trying to predict the future.  None of us are soothsayers from Lily Dale with magic 8 balls and tarot cards. 

So. Itís disingenuous to make the argument that you or anyone else can repeat success doing the exact same thing.  Now, using the 1% rule, you are greatly increasing your chances that a property will be profitable.  Itís not infallible. And Iím not saying it is. Itís just a damn formula for figuring out the value of a rental property so you donít lose your ass paying too much.   


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norajean

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Re: This is why I do not like the 1% rule
« Reply #28 on: November 21, 2020, 07:16:49 AM »
If you believe in appreciation over cash flow, you are probably better off flipping homes to turbocharge your returns.  Sitting on a property for years, dealing with renters, gets you market appreciation. Flipping gets you that along the way plus extra from the improvements you make to each carefully selected flip.  But be careful as a lot of flippers lose their shirts at some point. Hawaii is in trouble currently without tourists to support the economy. At some point that may push rents and home values down.

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #29 on: November 21, 2020, 10:39:47 AM »
I actually think we are having a great discussion, so thanks for that OP.

Maizefolk, I agree that a 1% discussion around the differences between cost of living  (LCOL vs VHCOL) would be very beneficial. For example, if you have a 50K home that meets the 1% rule (500/month rent), but needs a new roof that costs 10K will would be deadly to the profitability long term. However, a 800k home (say 5000/month) that needs a new 25K roof hardly makes a dent and can be recouped with 5 months worth of rent. The same goes for siding, upgrades, and everything else. I would argue that maintenance costs will remain comparable while vacancy rates will be lower for HCOL areas.

Then you combine the reality that HCOL homes tend to appreciate more/faster in HCOL areas compared to LCOL (primarily due to lack of land space and demand), then the 800K home may end up being extremely profitable and the 50K home to be a loser. One final thing to mention is that the upside of a 50K house, even if it doubles is worth only 100K. Where as even a 25% increase in the 800k increases the value to 1 million (200K gain). So the overall upside of the homes are not even comparable. The flip side is also true that even a 50% decrease to the 50K house is peanuts, while a 25% decrease in value of the 800K is very significant. 

This is why LCOL areas still have plenty of 1%+ homes while HCOL areas area around .3 to .5% yet still sell faster and have much more demand. 

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #30 on: November 21, 2020, 10:51:00 AM »
Walt,

I think that is another important question of whether the house prices will ever return to the mean. I say mostly NO.

1. it's the internet age and information such as the 1% rule and biggerpockets have pretty much made it so that people are better able to evaluate properties. less dumb purchases = less profitability for the rest of us.

2. it's important to note that in VHCOL areas, something like only the top 1-2% of the population purchases the majority of homes. Those folks are only getting richer. As another poster said, US VHCOL areas are underpriced compared to other major global cities. Also, there is no more land in VCHOL areas. What this does raise the cost of HCOL to VHCOL (ie SF people fleeing to Seattle or Portland or Austin and increasing their prices). I don't think this trend will stop per se. Even a fucking global pandemic didn't slow it down so not sure what will?

3. However, the LCOL areas may return to the mean because population decline and wage stagnation. But these places are still relatively affordable so not really relevant to the discussion.

Let me know what you think!

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #31 on: November 21, 2020, 10:59:02 AM »
With all that being said OP, you should seriously reconsider selling your home lol.

If there is one state that could be drastically affected by COVID or any other downturn, I would argue it is your home. No major businesses, no major college, etc.

It looks like you will be taking a significant property tax hit as well and that's big. Your cash flow is close to nil at this point. I feel like you clearly got lucky (as did many of us) and selling at the current peak and putting the proceeds at Vanguard may be a wise decision.

This is coming from a buy and hold until you die crowd. I just feel that the location of your home is not as stable as other places and you are playing with a lot of money. I personally wouldn't feel comfortable holding that home forever. But if you can stomach a 50% cut to your home value, then sure why not, keep it (you've been lucky thus far, maybe it will become 2mil in the near future?).

PS, I do agree with your "rule" of not penny pinching and finding the awesome home at a decent price rather than a shitty home at the lowest price.

However, I do all the work myself lol so I want the best price for the shittiest house in the best location and I will make it shine :)

waltworks

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Re: This is why I do not like the 1% rule
« Reply #32 on: November 21, 2020, 12:07:42 PM »
Yes, this brings up one of my pet peeves, which dovetails nicely with OP's general investing theme - very cheap houses can meet the 1% rule and lose you a ton of money. Very expensive houses can fail to meet the rule and make money. Overhead does go up for a more expensive house, but it doesn't track the house value, or even close.

There are <$100k places in the mid-Atlantic that are 1.5% or even 2%... but property taxes are so high that you'll hemorrhage money. There are places like OP's (though I still think the maintenance on a furnished rental in HI is 2-3x what he's claiming) where a non-1% rule property will make money.

Of course, a very expensive house is like putting a ton of money into an individual stock. It can be destroyed in an uninsurable disaster, it can be in a location where the biggest company in town/tourist economy shuts down, etc, etc. You can buy a nice falling down mansion in Detroit for like $10k, in what was the hottest HCOL neighborhood in the USA 60 years ago. So there's significant risk involved with very expensive properties (or lots of cheap ones in one location).

That said, people often forget that the 1% rule is intended to help quickly eliminate bad deals. It's the *first step*, just intended to save time if you're looking at lots of potential places. You have to actually run all the numbers for each individual property to figure out if it will make money.

-W

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #33 on: November 22, 2020, 06:21:36 AM »
I actually think we are having a great discussion, so thanks for that OP.

Maizefolk, I agree that a 1% discussion around the differences between cost of living  (LCOL vs VHCOL) would be very beneficial. For example, if you have a 50K home that meets the 1% rule (500/month rent), but needs a new roof that costs 10K will would be deadly to the profitability long term. However, a 800k home (say 5000/month) that needs a new 25K roof hardly makes a dent and can be recouped with 5 months worth of rent. The same goes for siding, upgrades, and everything else. I would argue that maintenance costs will remain comparable while vacancy rates will be lower for HCOL areas.

Then you combine the reality that HCOL homes tend to appreciate more/faster in HCOL areas compared to LCOL (primarily due to lack of land space and demand), then the 800K home may end up being extremely profitable and the 50K home to be a loser. One final thing to mention is that the upside of a 50K house, even if it doubles is worth only 100K. Where as even a 25% increase in the 800k increases the value to 1 million (200K gain). So the overall upside of the homes are not even comparable. The flip side is also true that even a 50% decrease to the 50K house is peanuts, while a 25% decrease in value of the 800K is very significant. 

This is why LCOL areas still have plenty of 1%+ homes while HCOL areas area around .3 to .5% yet still sell faster and have much more demand.


This was basically my point, but you did a much better job of explaining it. I think we finally got to some thoughtful discussion at the end and willing to look at both sides.

I do agree with Walt's philosophy of "you just bought yourself a job" when you apply it to buying 10 houses at 50K each and rent for 500/month. However, when you buy one 500K rental in HCOL area, the management time is probably 10-20 hours/year.

I'm currently looking at recent sales in my Fort Collins, CO neighborhood. It looks like we have two outliers that look to be good deals. Most of the 4 bed/2 bath rentals sold for 400K to 450K over the summer. Fall and winter sales tend to dip and be more representative of desperate sellers.

Two homes sold recently in the 365K range and need about 10K worth of work, mostly cosmetic.

Purchase price: $365,000
Loan of 273,750 at 3.5%
Principle and Interest: $1,229 ($431 going to principal)
Taxes: $190
Insurance: $81

Total PITI: $1500/month

Rent: $2500/month

Even though this deal falls short of the 1% rule, I would do this deal all day long. Before this recent search, I didn't actually realize it was even possible to buy 4 bed/2 bath in my rental neighborhood under 400K that wasn't a tear down. I think I am going to start looking again.
 
Thank you everyone for your contributions. I promise to not post on this topic, until I purchase another "non 1% deal" Once that happens, I will post again to share my numbers. Thank you for listening. I will be here all week.








waltworks

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Re: This is why I do not like the 1% rule
« Reply #34 on: November 22, 2020, 07:51:40 AM »
You can get 3.5% on an investment property now? Holy crap!

If interest rates ever go back up, the market is completely F'd.

-W

Papa bear

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Re: This is why I do not like the 1% rule
« Reply #35 on: November 22, 2020, 07:56:51 AM »
You can get 3.5% on an investment property now? Holy crap!

If interest rates ever go back up, the market is completely F'd.

-W
Yeah. And you can do better if you shop around.  Iím trying to cash out refi some of my places now while this lasts.  Itís nuts. 


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waltworks

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Re: This is why I do not like the 1% rule
« Reply #36 on: November 22, 2020, 08:54:57 AM »
My own house gained something like $500k of value in the last 8 months. It's awfully tempting GTFO and rent for a while. The house of cards has to collapse eventually.

Then again, I really don't want to move, even down the street.

-W

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #37 on: November 22, 2020, 07:52:27 PM »
With all that being said OP, you should seriously reconsider selling your home lol.

If there is one state that could be drastically affected by COVID or any other downturn, I would argue it is your home. No major businesses, no major college, etc.

It looks like you will be taking a significant property tax hit as well and that's big. Your cash flow is close to nil at this point. I feel like you clearly got lucky (as did many of us) and selling at the current peak and putting the proceeds at Vanguard may be a wise decision.

This is coming from a buy and hold until you die crowd. I just feel that the location of your home is not as stable as other places and you are playing with a lot of money. I personally wouldn't feel comfortable holding that home forever. But if you can stomach a 50% cut to your home value, then sure why not, keep it (you've been lucky thus far, maybe it will become 2mil in the near future?).

PS, I do agree with your "rule" of not penny pinching and finding the awesome home at a decent price rather than a shitty home at the lowest price.

However, I do all the work myself lol so I want the best price for the shittiest house in the best location and I will make it shine :)

Because I recently became aware that my sale price increased from 800K to 900K, I will make plans to increase the rent from $4,500/month to $5,000/month within the next 12 months. I know that doesn't make a huge difference, but I thought it was worth mentioning.

As a mental exercise, I will run a comparison analysis of selling and putting into Vanguard vs. letting it ride. I will assume $4,500/month in rent for this example.

Sell Price: $900,000
Deduct 7% for real estate transaction: $837,000
Current Mortgage Balance: $461,000
Capital Gains Tax (15%): $26,000

Remaining Balance: $350,000

Invested at Vanguard with a 7% return and 2% dividends = $31,500/year

If I keep the house, I get $12,000/year in cash flow and $8,500/year of principle pay down for a total of $20,500. At $900,000, if I got 1.22% appreciation/year that would get me $11,000 for a total return of $31,500/year.

As a result, it looks like the break even point is 1.22% appreciation/year.

Did I miss anything? 


waltworks

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Re: This is why I do not like the 1% rule
« Reply #38 on: November 22, 2020, 08:13:13 PM »
Well, you left out the risk. Like I said, this is like having $400k in a single stock.

I guess we'll have to agree to disagree on the maintenance ($3k/year!), management (zero!), and vacancy (zero!), but using your assumptions on those, yes, your numbers make sense (with the caveat that your specific tax situation could matter a lot in both cases).

-W
« Last Edit: November 22, 2020, 08:20:04 PM by waltworks »

Goldielocks

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Re: This is why I do not like the 1% rule
« Reply #39 on: November 22, 2020, 08:30:59 PM »
With all that being said OP, you should seriously reconsider selling your home lol.

If there is one state that could be drastically affected by COVID or any other downturn, I would argue it is your home. No major businesses, no major college, etc.

It looks like you will be taking a significant property tax hit as well and that's big. Your cash flow is close to nil at this point. I feel like you clearly got lucky (as did many of us) and selling at the current peak and putting the proceeds at Vanguard may be a wise decision.

This is coming from a buy and hold until you die crowd. I just feel that the location of your home is not as stable as other places and you are playing with a lot of money. I personally wouldn't feel comfortable holding that home forever. But if you can stomach a 50% cut to your home value, then sure why not, keep it (you've been lucky thus far, maybe it will become 2mil in the near future?).

PS, I do agree with your "rule" of not penny pinching and finding the awesome home at a decent price rather than a shitty home at the lowest price.

However, I do all the work myself lol so I want the best price for the shittiest house in the best location and I will make it shine :)

Because I recently became aware that my sale price increased from 800K to 900K, I will make plans to increase the rent from $4,500/month to $5,000/month within the next 12 months. I know that doesn't make a huge difference, but I thought it was worth mentioning.

As a mental exercise, I will run a comparison analysis of selling and putting into Vanguard vs. letting it ride. I will assume $4,500/month in rent for this example.

Sell Price: $900,000
Deduct 7% for real estate transaction: $837,000
Current Mortgage Balance: $461,000
Capital Gains Tax (15%): $26,000

Remaining Balance: $350,000

Invested at Vanguard with a 7% return and 2% dividends = $31,500/year

If I keep the house, I get $12,000/year in cash flow and $8,500/year of principle pay down for a total of $20,500. At $900,000, if I got 1.22% appreciation/year that would get me $11,000 for a total return of $31,500/year.

As a result, it looks like the break even point is 1.22% appreciation/year.

Did I miss anything?
Missed -- in many jurisdictions, you can't increase rent by 10% on existing tenants in a single year.  Locally we had a max 0% last year and 1.4% this year cap.  Only increase it more if they voluntarily move, but then you can be faced with 2wks to 1 month vacancy, too.

maizefolk

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Re: This is why I do not like the 1% rule
« Reply #40 on: November 22, 2020, 08:36:01 PM »
clarkfan1979, here I kind of agree with waltworks.

You are comparing the return on your property if nothing goes wrong -- no more than an average of 18 days of vacancy per year, no major maintenance that exceeds the $3,000/year that you have budgeted -- to an average stock market return which includes both years where nothing goes wrong and years where everything goes horribly, terribly wrong. That 9% CAGR includes the years of the Great Depression and Great Recession which were also really bad years to be a landlord.

So I'd argue to be comparing apples to apples the stock market return needs to be higher and/or the profitability assumptions of the rental much more conservative than seems reasonable.

Paul der Krake

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Re: This is why I do not like the 1% rule
« Reply #41 on: November 22, 2020, 08:40:04 PM »
Is the Kauai rental market able to support a $500 increase in rent on what sounds like a nice-but-not-particularly-luxurious rental? On Oahu the only rentals that do well right now are the luxury ones at 6-7k/month. Anything below appears to be softening.

Mrs. Sloth

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Re: This is why I do not like the 1% rule
« Reply #42 on: November 22, 2020, 08:46:53 PM »
Valid points from both sides. My husband and I have benefitted from the high appreciation on our rental properties. However, we are dealing with eviction moratoriums due to covid and 3 of our tenants are behind on rent and we currently have a vacant unit (house) we have decided to sell because the house next door suddenly seems to be collecting trash and started parking their big arse truck on their front lawn as well as using the street parking space in front of our rental. We weren't making much on that property (definitely not meeting the 1% rule) and we are self-managing. Rentals are not for everyone (can cause headaches) but they can be great for building wealth when  you dont have much of a stash and would benefit from rentals through leverage in areas with high appreciation (obviously not guaranteed).
« Last Edit: November 22, 2020, 08:51:36 PM by Mrs. Sloth »

Goldielocks

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Re: This is why I do not like the 1% rule
« Reply #43 on: November 22, 2020, 08:49:39 PM »
clarkfan1979, here I kind of agree with waltworks.

You are comparing the return on your property if nothing goes wrong -- no more than an average of 18 days of vacancy per year, no major maintenance that exceeds the $3,000/year that you have budgeted -- to an average stock market return which includes both years where nothing goes wrong and years where everything goes horribly, terribly wrong. That 9% CAGR includes the years of the Great Depression and Great Recession which were also really bad years to be a landlord.

So I'd argue to be comparing apples to apples the stock market return needs to be higher and/or the profitability assumptions of the rental much more conservative than seems reasonable.
@maizefolk  This is very true.... but.  the reality is that people make subjective evaluations of risk all the time, and it is understandable that clarkfan's approach or instinct about it is different from your viewpoint.   

I do like the caution to ensure that the risk comparison is not "unicorns" on one side, and "boring reality" on the other... that is always a good concern to have and a good suggestion to double check one's assumptions with new eyes.

I personally would not compare to better returns on the stock market, but rather ensure I padded out a few more unexpected costs on the negative side to build a bigger cushion, and run a series of "what if" projections (I think I am an IRR nerd with an excel spreadsheet).  Even with some padding, this rental's return, to me, seems to be on the balance point of "good investment" and "lots of work for marginal comparative return and elevated risk".  Specifically, I think it has a 50/50 shot of succeeding well, especially in the short term where one can estimate future events a bit more clearly.

Once the on-site friends get tired of managing the fix-ups, even for a good hourly rate, (say because the future tenants are a bit hard on the property) and if Clarkfan does not end up managing it locally himself, there will be concerns and a lot more effort on clarkfan's plate.  Independent contractors and managers would charge a fair bit more.

waltworks

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Re: This is why I do not like the 1% rule
« Reply #44 on: November 22, 2020, 09:31:11 PM »
That 9% CAGR includes the years of the Great Depression and Great Recession which were also really bad years to be a landlord.

The Great Recession actually wasn't bad at all for (residential) landlords. Rents never dropped in most areas. They increased in many! People lost their homes/went underwater - but then they went and rented a place. Sometimes the same place they were already living - I know people who bought foreclosures in Vegas and had the former owners as tenants from day 1.

That assumes you didn't buy a $800k place in 2005 that you rented for $2000 a month while you waited for appreciation and then got caught with your pants down, of course. But for people who used metrics like the 1% rule, the Great Recession was just peachy (and many of them bought more properties because suddenly great deals were everywhere).

-W

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #45 on: November 22, 2020, 09:33:13 PM »
Clarkfan,

1) Seems like your wealth is all real estate (I am assuming here). I feel safer diversifying into mutual funds. Others may disagree.
2) Capital gains tax - the longer you wait, the more taxes you will pay on the sell.
3) I think we can all agree that prices are inflated due to all time low rates. Do you feel this will continue? If it doesn't continue, then sales prices should decrease.
4) What is your end game? Is there a magic number at you would sell at? Do you feel this will be a great property to hold forever? If not, this seems like the perfect exit to sell high with minimal capital gains.

I would lean toward selling, but I can see why you would want to hold on to it. 



joe189man

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Re: This is why I do not like the 1% rule
« Reply #46 on: November 23, 2020, 08:45:49 AM »
i have no skin in this game, and no experience but lots of interest,

Clark - if you can cash out 350k from HI and get 3 places in fort collins (a state where you appear to live) that cash flow $1 a month each, that seems like a no brainer (~$36,000/yr in a rapidly growing state/ college town), the appreciation in FOCO on a ~400k place should be better long term compared to a 900k place in HI, and much easier for a buyer to afford. if CO appreciation continues like it has over the last 10 years you should see multiple 100k gains over the next 10 years. and if not you will always have college kids to rent to.

my friends wife is a realtor/flipper in fort collins, she always finds a place to flip and turn a profit there

Bloop Bloop Reloaded

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Re: This is why I do not like the 1% rule
« Reply #47 on: November 24, 2020, 12:00:29 AM »
You can get 3.5% on an investment property now? Holy crap!

If interest rates ever go back up, the market is completely F'd.

-W
Yeah. And you can do better if you shop around.  Iím trying to cash out refi some of my places now while this lasts.  Itís nuts. 


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My interest rate on my $600k IP mortgage (on which I still owe about $400k) is 2.88% per year. I could probably get it down to 2.75% if I really bailed up my bank manager.

After our tax write off here in Australia (47% at top bracket) the effective interest rate is 1.5% per year.

Housing for us isn't even an investment per se, it's more like a safe store of money. That's what I use it for - it's like a vault. I think there will always be families willing to rent an established house in a good area close to schools.

vand

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Re: This is why I do not like the 1% rule
« Reply #48 on: November 24, 2020, 04:39:15 AM »
Here in Melbourne you could barely find a single home that has a monthly rent of 0.5% of its price, let alone 1%.

The fact that homes in the US can qualify for the 1% rule makes me think that their capital value is woefully underpriced (or maybe Australian homes are overpriced).

Similar here in the UK.
US housing does seem cheaper, at least the headline prices.

I think offsetting this at least partly are higher taxes (depending on the state), and US houses also use almost triple the amount of energy as UK homes so running costs will be significantly higher. Insurance seems high in the US too, maybe because many parts are affected by hurricanes etc. Here we can insure a home for as little as $150/year, whereas US average seems to be up around ten times that.

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #49 on: November 24, 2020, 06:15:18 AM »
Clarkfan,

1) Seems like your wealth is all real estate (I am assuming here). I feel safer diversifying into mutual funds. Others may disagree.
2) Capital gains tax - the longer you wait, the more taxes you will pay on the sell.
3) I think we can all agree that prices are inflated due to all time low rates. Do you feel this will continue? If it doesn't continue, then sales prices should decrease.
4) What is your end game? Is there a magic number at you would sell at? Do you feel this will be a great property to hold forever? If not, this seems like the perfect exit to sell high with minimal capital gains.

I would lean toward selling, but I can see why you would want to hold on to it.

I think most people on this MMM forum feel safer in mutual fund/index funds than real estate. I originally sold around $50,000 of stock in March 2007 to fund my first real estate deal in May 2007. During this time, it looks like the S & P 500 increased by 7.3%. Add another 2% for dividends and my $50,000 would now be worth $173,641.

Since May 2007 I have been using the profits from real estate to buy more real estate. My original $50,000 investment is now $755,000 of equity. If I sold everything, it would be $625,000 after real estate commission and closing costs. I would have some capital gains, but you could also make the same argument for stocks, so if I was to compare apples to apples it would be $173,631 (stocks) vs. $625,000 (real estate).

I think there is another 12-18 months left for real estate prices to increase based on low mortgage rates. After that, I would expect it to slow down and/or stop. If I did sell Kauai, it wouldn't be for another 12-18 months. However, the current plan is to hold on for ever.

Yes, I could sell Kauai and buy 3 additional rentals in Fort Collins, CO. However, my equity position would go from 40% to 27%. I personally like to stay around 40% equity based on metrics for the book "Millionaire Real Estate Investor" It would also be more work. However, it is a viable option that should be worth considering.

I am in contact with a mortgage broker for Kauai. He quoted me a refinance of 3.125% with no points. This is crazy low for an investment property. I will be pursuing this after my current re-finance of Fort Collins is over, which should be in 30-35 days.