Author Topic: This is why I do not like the 1% rule  (Read 5121 times)

Paper Chaser

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Re: This is why I do not like the 1% rule
« Reply #50 on: November 24, 2020, 08:01:26 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).

If you're trying to have a fair comparison, it's tough to compare non-leveraged stock holding returns to leveraged real estate returns right? If you'd leveraged your stock to the same dollar amount as your real estate, what would the return have been?
I don't think you're arguing as much in favor of real estate as an asset class as you are arguing in favor of leverage as a tool.

Papa bear

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This is why I do not like the 1% rule
« Reply #51 on: November 24, 2020, 08:27:51 AM »
I really donít understand the buy and hold strategy if you are looking at appreciation as your main strategy.  Listen, you made money on paper.  You donít realize any of those gains UNLESS you sell. These arenít stocks.  You canít liquidate 4% of your rental property a year.   So keeping an appreciated house without an increase in rents is like having a piece of fancy artwork.  Sure itís worth something.  But can you use it? Hell no! Actually, itís worse! You pay taxes on the value of that real estate.  Your costs increase with your paper wealth.  Find me another asset class where that happens!

With literally any asset, itís basically worthless unless you can trade it for cash.  You can either get rents, dividends, interest, or you HAVE to have an exit strategy to sell.  Sure, you can borrow against the equity, but that costs money (interest and fees) and is risky. You can lose your asset if you canít pay the terms of the loan. 

So great! If you speculated on appreciation and your assets increased a lot, thatís awesome!  But you have to sell your asset!   

If you get a property where rents move with value, and you buy a place for itsí rents, you get actual, usable money.  You donít have to sell your asset to realize gains.  And if rents track value, your rents increase! Holy moly!

So, add another tally to the 1% rule works column.


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« Last Edit: November 24, 2020, 08:50:59 AM by Papa bear »

waltworks

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Re: This is why I do not like the 1% rule
« Reply #52 on: November 24, 2020, 08:45:15 AM »
The famous Rothschild quote is worth remembering when it comes to appreciation plays (or, speculation):

ďI never buy at the bottom and I always sell too soon.Ē

Lots of people would have done fine/been set for life in 2005 if they'd just taken their RE winnings off the table, but they just kept doubling down because they thought the old rules of price/income/debt/etc didn't apply anymore. I'm not sure we're quite at that stage yet this time around but we're on our way.

Like the OP, I made a ton of money in RE in the last decade. It was hard *not* to, even if you had no idea what you were doing. I'd be a little bit richer now if I'd held onto all my properties even longer, but I didn't/don't need to hit home runs to be FI, and I have no regrets having sold them.

I guess when it comes down to it, my real problem with the OP's thesis here is that he's presenting it as *advice* to would-be RE investors. Indeed, he ignored (or was unaware of) the 1% rule, and he's done great (assuming he sells the properties and realizes the gains at some point). But advocating the same thing now that worked in 2010 seems irresponsible at best, and roughly equivalent to saying that you bought Tesla, or Bitcoin, or some other speculative investment at that time, so new investors should do the same now.

It's important to recognize the role of luck in any situation, but our instinct is to give ourselves more credit than we probably deserve when things go well. I didn't know anything about RE investing in 2008 when my wife and I bought our first place, and wow, now we're rich. But that was fortune, not skill.

-W
« Last Edit: November 24, 2020, 10:54:27 AM by waltworks »

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #53 on: November 24, 2020, 10:49:28 AM »
I appreciate the response Clarkfan,

Sounds like you are like me in that you plan to hold homes forever. As papa bear put it, then the 1% rule needs to be your religion (or at least getting close to it). This also means that you are most likely better off putting homes into "safer" neighborhoods because appreciation is irrelevant if you never sell and your only focus should be rent vs purchase price.

For the record, I said diversifying with mutual funds. My net worth is very real estate heavy due to appreciation, but my preference is to be 50/50 (stocks/real estate).

I also think you are misleading readers if you are claiming that you made 50k into 755k. You have certainly put more than money into real estate outside of the original 50K. This also includes work and time, but most importantly extreme luck that is not replicable today. There are people who will say they put 5 cents into bitcoin and now are millionaires. good for them, but that's just luck and they most likely can't do that again.

With that said, huge kudos for taking the risk and growing your net worth with homes. I'm in the same boat as you. I too believe that I can make more money (and faster) with homes than stocks, but I fully acknowledge that it is more risky and requires 1000% more work and time.

I'm curious now, do you own any stocks?

 

Dicey

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Re: This is why I do not like the 1% rule
« Reply #54 on: November 24, 2020, 03:13:23 PM »
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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We're getting quotes at 3%, on our rentals, but the fees are insane! I think we're going to wait and see what the New Year brings.

waltworks

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Re: This is why I do not like the 1% rule
« Reply #55 on: November 24, 2020, 05:54:53 PM »
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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We're getting quotes at 3%, on our rentals, but the fees are insane! I think we're going to wait and see what the New Year brings.

Yeah, to be clear - I meant, can you get ~3.5% without paying through the nose for points.

You can get crazy low rates if you pay enough money, that's always true.

-W

Archipelago

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Re: This is why I do not like the 1% rule
« Reply #56 on: November 24, 2020, 10:29:52 PM »
The famous Rothschild quote is worth remembering when it comes to appreciation plays (or, speculation):

ďI never buy at the bottom and I always sell too soon.Ē

Lots of people would have done fine/been set for life in 2005 if they'd just taken their RE winnings off the table, but they just kept doubling down because they thought the old rules of price/income/debt/etc didn't apply anymore. I'm not sure we're quite at that stage yet this time around but we're on our way.

Like the OP, I made a ton of money in RE in the last decade. It was hard *not* to, even if you had no idea what you were doing. I'd be a little bit richer now if I'd held onto all my properties even longer, but I didn't/don't need to hit home runs to be FI, and I have no regrets having sold them.

I guess when it comes down to it, my real problem with the OP's thesis here is that he's presenting it as *advice* to would-be RE investors. Indeed, he ignored (or was unaware of) the 1% rule, and he's done great (assuming he sells the properties and realizes the gains at some point). But advocating the same thing now that worked in 2010 seems irresponsible at best, and roughly equivalent to saying that you bought Tesla, or Bitcoin, or some other speculative investment at that time, so new investors should do the same now.

It's important to recognize the role of luck in any situation, but our instinct is to give ourselves more credit than we probably deserve when things go well. I didn't know anything about RE investing in 2008 when my wife and I bought our first place, and wow, now we're rich. But that was fortune, not skill.

-W

Wholeheartedly agree. Anyone who invested in real estate in '09-'10 made money and huge returns. Has been that way for over a decade. OP's advice is definitely not for would-be RE investors. New investors are best off thoroughly understanding the costs associated with owning property. Another problem which others have clearly pointed out in this thread is that OP is vastly under estimating/under reporting rental expenses. E.g. CapEx, property management and maintenance. Why people claim self managing rentals equates to a $0 expense is beyond me. Time is never worth $0.

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #57 on: November 25, 2020, 08:30:05 AM »
I have cash flow. I just don't get enough cash flow for 1%. My current cash flow after mortgage is $3,200. After vacancy, repairs and some utilities it's $2,200/month. After I am done refinancing everything in 3 months, my cash flow will bump up to $2,500/month. This also accounts for my property taxes increasing for Kauai by $360/month in July 2021.

For my 3 rentals, they were originally owner-occupied homes. Yes, with each purchase there was a fairly intensive 6 month rehab. I lived in each house for 1-4 years and fixed everything. Because I fixed everything when I lived there and made repairs with the intent of it being a rental, this is why cap ex and repairs are lower than normal.

Two are college rentals with 0% vacancy. Sorry, this is true. 

Yes, I spend around 100 hours/year on self-managing my rentals. My two college rentals are around 20 hours/year each. However, the Kauai rental is 60 hours/year because I have to do landscaping. I do have long term plans to thin out the vegetation.

I spend around 1,100 hours/year at my day job and another 100 hours/year for my rentals. Overall, I don't work that much.

For the past 5 years, my wife and I spend about $500-$1000/month of our rental cash flow on living expenses. If we didn't do this our real estate returns would actually be much higher.

Overall, I think this should be less about me and more about the theoretical strategy. I think others have done much better than me in real estate. Below is a youtube video of someone that I recently found. Her path seems to be very similar to mine. She went from zero to 2 million in about 15 years, mostly with leveraged real estate. She talks more about buying in good areas with appreciation and less about cash flow.

https://www.youtube.com/watch?v=QEDD5uDP6yQ








https://www.youtube.com/watch?v=QEDD5uDP6yQ
« Last Edit: November 25, 2020, 08:50:09 AM by clarkfan1979 »

waltworks

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Re: This is why I do not like the 1% rule
« Reply #58 on: November 25, 2020, 08:45:00 AM »
Ok, so 100 hours a year is, at a professional/missing time with your family wage, $10k. So if your cash flow per month is $2k, you're netting $12k/year on like, what, $500k-$1million of RE equity?

That is not buying you that much time with your family compared to boring-ass index funds which would throw off more money, take zero time, and be less risky.

-W

Papa bear

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Re: This is why I do not like the 1% rule
« Reply #59 on: November 25, 2020, 09:56:15 AM »
I have cash flow. I just don't get enough cash flow for 1%. My current cash flow after mortgage is $3,200. After vacancy, repairs and some utilities it's $2,200/month. After I am done refinancing everything in 3 months, my cash flow will bump up to $2,500/month. This also accounts for my property taxes increasing for Kauai by $360/month in July 2021.

For my 3 rentals, they were originally owner-occupied homes. Yes, with each purchase there was a fairly intensive 6 month rehab. I lived in each house for 1-4 years and fixed everything. Because I fixed everything when I lived there and made repairs with the intent of it being a rental, this is why cap ex and repairs are lower than normal.

Two are college rentals with 0% vacancy. Sorry, this is true. 

Yes, I spend around 100 hours/year on self-managing my rentals. My two college rentals are around 20 hours/year each. However, the Kauai rental is 60 hours/year because I have to do landscaping. I do have long term plans to thin out the vegetation.

I spend around 1,100 hours/year at my day job and another 100 hours/year for my rentals. Overall, I don't work that much.

For the past 5 years, my wife and I spend about $500-$1000/month of our rental cash flow on living expenses. If we didn't do this our real estate returns would actually be much higher.

Overall, I think this should be less about me and more about the theoretical strategy. I think others have done much better than me in real estate. Below is a youtube video of someone that I recently found. Her path seems to be very similar to mine. She went from zero to 2 million in about 15 years, mostly with leveraged real estate. She talks more about buying in good areas with appreciation and less about cash flow.

https://www.youtube.com/watch?v=QEDD5uDP6yQ








https://www.youtube.com/watch?v=QEDD5uDP6yQ
I have college rentals.  While they are always ďoccupiedĒ and rent 8 months in advance, I can still have less than full rent payment.  Never had anyone skip out on the last month when they were seniors AND have damage?  Deposit wonít cover everything. 

Or like right now, Iíve got a place where the tenants are all moving out because they canít stand each other, blaming getting covid on each other, scrambling to find subleases.  I fully expect to miss out on a few hundred in rent.   Sure. Itís technically 0 vacancy, but 100% rent collection is basically impossible over a number of units and lots of time.  9/10 years are no problem!  1/10 and Iím going to be at 80-90% rent.  Count that as vacancy or reduced rent, whatever you want to call it. But it ainít 100%.


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PMJL34

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Re: This is why I do not like the 1% rule
« Reply #60 on: November 25, 2020, 11:13:49 AM »
Clarkfan,

First, I need a sincere apology from you for posting that stupid youtube link. It's about this 40 year old who owns 4 properties  (first property bought in 2005 btw) with a combined worth of barely 1 million, but with about 750k in mortgages. She also has 200k in stocks. that is nowhere near 0 to 2 million in 15 years. I hope she's your wife or friend that you just wanted to plug and not someone you take advice from. Shame on me for clicking.

Second of all, I understand that you want to discuss the concept and not your personal holdings, but the more details you provide, the less attractive your real estate holdings are. You are attempting to paint this very rosy, easy, hands off picture of real estate (and a cash cow) and it's simply not true.

It sounds like your total cash flow for all of your properties is 2200/month! That's with self-managing and your 0 vacancy and very very low repairs/maintenance estimates. On 3 properties worth 1.5 million? Clark, this is exactly why people are preaching the 1%. If you would have stuck to better purchases, you would be cash flowing 15,000/month. You also haven't answered why you are so focused on appreciation if you don't want to sell. It does nothing for you. The bottomline is 2200 cashflow (without any major vacancies or repairs) on homes valued at 1.5 million.

I'm on your side and trying to support your concepts, but you gotta give me something to work with.
 

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #61 on: November 25, 2020, 12:29:14 PM »
I have cash flow. I just don't get enough cash flow for 1%. My current cash flow after mortgage is $3,200. After vacancy, repairs and some utilities it's $2,200/month. After I am done refinancing everything in 3 months, my cash flow will bump up to $2,500/month. This also accounts for my property taxes increasing for Kauai by $360/month in July 2021.

For my 3 rentals, they were originally owner-occupied homes. Yes, with each purchase there was a fairly intensive 6 month rehab. I lived in each house for 1-4 years and fixed everything. Because I fixed everything when I lived there and made repairs with the intent of it being a rental, this is why cap ex and repairs are lower than normal.

Two are college rentals with 0% vacancy. Sorry, this is true. 

Yes, I spend around 100 hours/year on self-managing my rentals. My two college rentals are around 20 hours/year each. However, the Kauai rental is 60 hours/year because I have to do landscaping. I do have long term plans to thin out the vegetation.

I spend around 1,100 hours/year at my day job and another 100 hours/year for my rentals. Overall, I don't work that much.

For the past 5 years, my wife and I spend about $500-$1000/month of our rental cash flow on living expenses. If we didn't do this our real estate returns would actually be much higher.

Overall, I think this should be less about me and more about the theoretical strategy. I think others have done much better than me in real estate. Below is a youtube video of someone that I recently found. Her path seems to be very similar to mine. She went from zero to 2 million in about 15 years, mostly with leveraged real estate. She talks more about buying in good areas with appreciation and less about cash flow.

https://www.youtube.com/watch?v=QEDD5uDP6yQ








https://www.youtube.com/watch?v=QEDD5uDP6yQ
I have college rentals.  While they are always ďoccupiedĒ and rent 8 months in advance, I can still have less than full rent payment.  Never had anyone skip out on the last month when they were seniors AND have damage?  Deposit wonít cover everything. 

Or like right now, Iíve got a place where the tenants are all moving out because they canít stand each other, blaming getting covid on each other, scrambling to find subleases.  I fully expect to miss out on a few hundred in rent.   Sure. Itís technically 0 vacancy, but 100% rent collection is basically impossible over a number of units and lots of time.  9/10 years are no problem!  1/10 and Iím going to be at 80-90% rent.  Count that as vacancy or reduced rent, whatever you want to call it. But it ainít 100%.


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I have one college rental in Fort Collins since 2007 and it has zero days vacancy during this time. I collect first months rent, last months rent and deposit before they move in. Could something happen in the future? Sure. However, so far it's been 0% vacancy over 13.5 years.

My other college rental is in Fort Myers, FL and it has 1 day of vacancy since August 2015.




clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #62 on: November 25, 2020, 12:32:29 PM »
Clarkfan,

First, I need a sincere apology from you for posting that stupid youtube link. It's about this 40 year old who owns 4 properties  (first property bought in 2005 btw) with a combined worth of barely 1 million, but with about 750k in mortgages. She also has 200k in stocks. that is nowhere near 0 to 2 million in 15 years. I hope she's your wife or friend that you just wanted to plug and not someone you take advice from. Shame on me for clicking.

Second of all, I understand that you want to discuss the concept and not your personal holdings, but the more details you provide, the less attractive your real estate holdings are. You are attempting to paint this very rosy, easy, hands off picture of real estate (and a cash cow) and it's simply not true.

It sounds like your total cash flow for all of your properties is 2200/month! That's with self-managing and your 0 vacancy and very very low repairs/maintenance estimates. On 3 properties worth 1.5 million? Clark, this is exactly why people are preaching the 1%. If you would have stuck to better purchases, you would be cash flowing 15,000/month. You also haven't answered why you are so focused on appreciation if you don't want to sell. It does nothing for you. The bottomline is 2200 cashflow (without any major vacancies or repairs) on homes valued at 1.5 million.

I'm on your side and trying to support your concepts, but you gotta give me something to work with.


Show me how I get to 15,000/month in cash flow in 13 years with an initial investment of $50,000. Also, at year 8 start deducting $750/month for living expenses. 

I'm all ears.
« Last Edit: November 25, 2020, 12:34:17 PM by clarkfan1979 »

Papa bear

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Re: This is why I do not like the 1% rule
« Reply #63 on: November 25, 2020, 12:42:00 PM »
I have cash flow. I just don't get enough cash flow for 1%. My current cash flow after mortgage is $3,200. After vacancy, repairs and some utilities it's $2,200/month. After I am done refinancing everything in 3 months, my cash flow will bump up to $2,500/month. This also accounts for my property taxes increasing for Kauai by $360/month in July 2021.

For my 3 rentals, they were originally owner-occupied homes. Yes, with each purchase there was a fairly intensive 6 month rehab. I lived in each house for 1-4 years and fixed everything. Because I fixed everything when I lived there and made repairs with the intent of it being a rental, this is why cap ex and repairs are lower than normal.

Two are college rentals with 0% vacancy. Sorry, this is true. 

Yes, I spend around 100 hours/year on self-managing my rentals. My two college rentals are around 20 hours/year each. However, the Kauai rental is 60 hours/year because I have to do landscaping. I do have long term plans to thin out the vegetation.

I spend around 1,100 hours/year at my day job and another 100 hours/year for my rentals. Overall, I don't work that much.

For the past 5 years, my wife and I spend about $500-$1000/month of our rental cash flow on living expenses. If we didn't do this our real estate returns would actually be much higher.

Overall, I think this should be less about me and more about the theoretical strategy. I think others have done much better than me in real estate. Below is a youtube video of someone that I recently found. Her path seems to be very similar to mine. She went from zero to 2 million in about 15 years, mostly with leveraged real estate. She talks more about buying in good areas with appreciation and less about cash flow.

https://www.youtube.com/watch?v=QEDD5uDP6yQ








https://www.youtube.com/watch?v=QEDD5uDP6yQ
I have college rentals.  While they are always ďoccupiedĒ and rent 8 months in advance, I can still have less than full rent payment.  Never had anyone skip out on the last month when they were seniors AND have damage?  Deposit wonít cover everything. 

Or like right now, Iíve got a place where the tenants are all moving out because they canít stand each other, blaming getting covid on each other, scrambling to find subleases.  I fully expect to miss out on a few hundred in rent.   Sure. Itís technically 0 vacancy, but 100% rent collection is basically impossible over a number of units and lots of time.  9/10 years are no problem!  1/10 and Iím going to be at 80-90% rent.  Count that as vacancy or reduced rent, whatever you want to call it. But it ainít 100%.


Sent from my iPhone using Tapatalk

I have one college rental in Fort Collins since 2007 and it has zero days vacancy during this time. I collect first months rent, last months rent and deposit before they move in. Could something happen in the future? Sure. However, so far it's been 0% vacancy over 13.5 years.

My other college rental is in Fort Myers, FL and it has 1 day of vacancy since August 2015.
Yeah, Iím going on 14 years with 3 units.  Itís like 99% filled. But something will happen, sometime.  This is my year, may take a decent hit.  Covid excuses on 2 units.   One is slow pay, mostly paid. The other, all in, but up and moved out.  Good luck for me collecting on the rest of their money! In the court of public opinion, I lose this battle.  So, cut ties and re rent short term lease.  Hopefully at or close to full amount, but thatís not a certainty, especially as the university sent everyone home. 


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MrThatsDifferent

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Re: This is why I do not like the 1% rule
« Reply #64 on: November 25, 2020, 12:48:29 PM »
OP, did you say youíre going to increase the rent by $500/month in the next year, while weíre going through a pandemic? :-(

waltworks

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Re: This is why I do not like the 1% rule
« Reply #65 on: November 25, 2020, 12:56:23 PM »
Show me how I get to 15,000/month in cash flow in 13 years with an initial investment of $50,000. Also, at year 8 start deducting $750/month for living expenses. 

I'm all ears.

Go find some of @arebelspy's old threads/story. He started around the same time and with no more resources but bought for cash flow. Similar timing/luck... much much more money. I'm pretty sure he's at over over $15k/mo in cash flow, or was at least. He may have sold all the places by now.

Edit: They were getting around $90/year in cash flow in 2015, apparently. Not sure since then, but that was only 7 years (starting in 2008), not 13, so certainly you could get there if you kept looking for opportunities and/or paid off some mortgages.

Here he is:
https://www.businessinsider.com/teachers-early-retirement-traveling-the-world-2017-1

-W
« Last Edit: November 25, 2020, 01:02:26 PM by waltworks »

oldmannickels

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Re: This is why I do not like the 1% rule
« Reply #66 on: November 25, 2020, 01:14:42 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?

Shouldn't be any capital gains if it was your primary residence.

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #67 on: November 25, 2020, 01:26:01 PM »
I have read those threads and listened to his interviews. I even had a few exchanges with him on this forum on this topic in the past.

He used excess W-2 income to buy more rentals. Based on what I remember they were making 75K, living on 35K and using the difference to buy more rentals. As a result, he is not a good example of what you are claiming.

You are claiming 15,000/month, after 13 years with with an initial investment of $50,000. If it's so simple, show me the math. I imagine it's going to get real difficult if you hold yourself to the same assumptions that you are holding me.

I also think equity position is extremely important to minimize risk. For some reason people here think if you get a 1% deal, equity position doesn't matter. In my opinion, it matters very much. If you have a rental that goes bad and you rent is zero and you need to sell, cash flow no longer matters. At that point, equity matters.

Below is a ballpark of my equity position over the years. I'm also including my current personal residence, which is around 30%. My rentals have an equity position of 43%. Combined, it's around 40%.

2007: 20%
2008: 30%
2009: 31%
2010: 32%
2011: 33%
2012: 36%
2013: 41%
2014: 47%
2015: 56%
2016: 63%
2017: 70%
2018: 41%
2019: 37%
2020: 40%


waltworks

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Re: This is why I do not like the 1% rule
« Reply #68 on: November 25, 2020, 01:37:08 PM »
Dude, you got lucky. Your strategy was bad but it worked due to luck. Just own it. Would you/could you repeat this, starting now? Of course not. So it's not even interesting to discuss.

For reference:
Joe explains: "Eventually we ended up with 15 properties, but only four with mortgages. $13,000-plus in gross rents each month, less $2,000 per month in mortgages."

Dude was FI years ago, with way less income, starting with zilch just like you. Because he bought for cash flow. Even with zero appreciation, he'd have ended up FI. With appreciation he's got higher NW I'd guess, and his wife isn't working part time at Target (which, ok, maybe she likes?)

-W

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #69 on: November 25, 2020, 01:56:57 PM »
Dude, you got lucky. Your strategy was bad but it worked due to luck. Just own it. Would you/could you repeat this, starting now? Of course not. So it's not even interesting to discuss.

For reference:
Joe explains: "Eventually we ended up with 15 properties, but only four with mortgages. $13,000-plus in gross rents each month, less $2,000 per month in mortgages."

Dude was FI years ago, with way less income, starting with zilch just like you. Because he bought for cash flow. Even with zero appreciation, he'd have ended up FI. With appreciation he's got higher NW I'd guess, and his wife isn't working part time at Target (which, ok, maybe she likes?)

-W


Show me the math.

This is the foundational argument of the entire discussion.

I showed you my returns, now show me yours.

If you can't support your argument with math, your contributions are meaningless. 

I'm waiting...

waltworks

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Re: This is why I do not like the 1% rule
« Reply #70 on: November 25, 2020, 04:13:21 PM »
Dude, you got lucky. Your strategy was bad but it worked due to luck. Just own it. Would you/could you repeat this, starting now? Of course not. So it's not even interesting to discuss.

For reference:
Joe explains: "Eventually we ended up with 15 properties, but only four with mortgages. $13,000-plus in gross rents each month, less $2,000 per month in mortgages."

Dude was FI years ago, with way less income, starting with zilch just like you. Because he bought for cash flow. Even with zero appreciation, he'd have ended up FI. With appreciation he's got higher NW I'd guess, and his wife isn't working part time at Target (which, ok, maybe she likes?)

-W


Show me the math.

This is the foundational argument of the entire discussion.

I showed you my returns, now show me yours.

If you can't support your argument with math, your contributions are meaningless. 

I'm waiting...

They're not my returns, and I don't know details beyond 15 doors and the other numbers in the article. You can probably dig around for @arebelspy posts from back in the day (or maybe he'll chime in). I'm not going to, because I'm not making outrageous claims. 15, 1-2% properties purchased in the 2008-2010 timeframe is a freaking money volcano at this point - the places in Vegas you could get were like $50-100k and rented for $1500 *back then*. 

Look, your thesis is, as I understand it:
-I ignored the 1% rule
-I made money
-Therefore the 1% rule is dumb

But your conclusion doesn't follow at all. You can do lots of things that require skill/follow particular rules through luck (ie, winning money during a night of poker as a total uninterested/naive beginner, which I've done) but that doesn't mean that following rules or developing skill is dumb. It means you got lucky.

-W

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Re: This is why I do not like the 1% rule
« Reply #71 on: November 25, 2020, 05:10:26 PM »
Are you looking for a dick measuring contest? You made money.  No one doubts that.  You made money because

1) basically everyone who bought real estate during those times made some money.
2) you probably bought some less than perfect places that were below market rate
3) you did repairs and capital improvements to increase value. 

Thereís nothing wrong with what you did.  BUT saying your way is repeatable, right now, in current conditions is irresponsible. 

And youíre arguing, originally, that because you made money on steps 1-3 above, the 1% rule isnít valuable, useful, or even worthwhile to look at.  But anyone who bought at your time with a 1% rule property made out like kings too.

Thing is, Iím netting 50% more on one double than you are with all your properties. Thatís my best possible place, and thereís not a chance in hell I can repeat that today.  It was a 1.5% in a 1% area property because it was a distressed sale.  I made capital improvements.  Doubled rent.  The whole area kept going up and rentals are now selling in the .75% range.  I would have doubled my money doing absolutely nothing!

Things that have been more repeatable (at least through end of 2018) were buying 1% rule properties, making capital improvements, and doubling rents.   Still close to a market value 1% rule area even now, maybe .9% at the moment.  But that? Itís repeatable.   

Thereís more than one way to skin a cat. You like slow flips that you then rent out for low cash flow. Not my cup of tea.  If Iím flipping a place and the rents suck, Iím selling that shit and moving on. 


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PMJL34

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Re: This is why I do not like the 1% rule
« Reply #72 on: November 25, 2020, 08:35:39 PM »
Man y'all are plowing it on lol.

There's no way to put it Clarkfan, $2200 cashflow with your 3 rentals after 13 years while self managing is nothing to brag about. The only thing you have is appreciation and please don't take credit for that as we all know you (and I) benefitted from the once in a lifetime recession plus longest bull ever.

You still haven't answered, do you have any 401k/IRA/brokerage?
 
But whatever, we are way off course.
 
EDIT: even with your appreciation, without selling, means absolutely nothing. We still don't know what your end game is here. Keep a rental valued at 900K for a cashflow of 1000/month that's just not good enough imo?
« Last Edit: November 25, 2020, 08:38:19 PM by lilbenny34 »

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #73 on: November 26, 2020, 06:25:52 AM »
Clarkfan,

First, I need a sincere apology from you for posting that stupid youtube link. It's about this 40 year old who owns 4 properties  (first property bought in 2005 btw) with a combined worth of barely 1 million, but with about 750k in mortgages. She also has 200k in stocks. that is nowhere near 0 to 2 million in 15 years. I hope she's your wife or friend that you just wanted to plug and not someone you take advice from. Shame on me for clicking.

Second of all, I understand that you want to discuss the concept and not your personal holdings, but the more details you provide, the less attractive your real estate holdings are. You are attempting to paint this very rosy, easy, hands off picture of real estate (and a cash cow) and it's simply not true.

It sounds like your total cash flow for all of your properties is 2200/month! That's with self-managing and your 0 vacancy and very very low repairs/maintenance estimates. On 3 properties worth 1.5 million? Clark, this is exactly why people are preaching the 1%. If you would have stuck to better purchases, you would be cash flowing 15,000/month. You also haven't answered why you are so focused on appreciation if you don't want to sell. It does nothing for you. The bottomline is 2200 cashflow (without any major vacancies or repairs) on homes valued at 1.5 million.

I'm on your side and trying to support your concepts, but you gotta give me something to work with.

"If you would have stuck to better purchases, you would be cash flowing 15,000/month"


Please explain to me how I get to 15,000/month of cash flow in 13.5 years based on an initial investment of $50,000. After year 8, start deducting $750/month of cash flow for living expenses. You are making very strong claims that I could have done better with sticking with the 1% rule. As a result, I am simply asking that you support it with math.

I never made any claims about stocks, so I do not understand why you feel entitled for an answer regarding stocks. We are not talking about stocks. But fine, we have around 140K of index funds in retirement accounts.

I also didn't buy real estate in 2009-2010 as everyone is claiming. I bought in 2007, 2012, 2018 and 2019. My first purchase was May 2007. Based on national trends, this is technically the worst time to purchase a house because it was right before everything collapsed.

Part of the reason why my cash flow is low is because I did two major cash-out re-fi's to buy more real estate. For example, my original mortgage for Fort Collins was $950/month, then slowly increased to $1050 with increases in taxes. I did a cash out re-fi and pulled out 148K and my payment went up to $1650/month. However, I used the money to buy Kauai which increased from 660K to 900K in 2.5 years. I don't understand how this is a bad decision.

I have been on here since 2014 sharing my story. In 2017 my net worth hit 500K and I was asking for ideas on how to get to one million. I suggested real estate and many here shouted from the rooftops that it couldn't be done. I was told the party was over. Now in 2020 our net worth is 925K and people are telling me that I made a mistake. I should have bought better properties more consistent with the 1% rule. 

Yes, we are in agreement that we made money. However, we are not in agreement that I would have done better by sticking with the 1% rule. This is what I am arguing against. Show me how I get to 755K of real estate equity in 13.5 years with an initial investment of 50K and then start deducting $750/month for living expenses at year 8. Our current cash position of 42,000 is a direct result of a cash-out re-fi on a rental in 2019. We took out 107K out of the Florida house. We used 60K to buy our primary house and we had 47K of cash left over.

From my perspective, this has been frustrating because no one will support the 1% with math for wealth generation. Until someone does that, I think we will continue to go in circles. 

One more thing. I do not remember specifically who said what. But when arebelspy was doing his thing in 2014, the majority of people on MMM were not supportive of his plan. I'm not sure if those people are still here or left. Six years ago he was considered to be a reckless idiot gambling with real estate in Vegas. Now in 2020, he is considered to be a genius. I think I was one of the few that was supportive of what he was doing because I was doing something similar in Florida at the same time.

I am here to learn. I am listening. Teach me.
« Last Edit: November 26, 2020, 07:09:15 AM by clarkfan1979 »

waltworks

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Re: This is why I do not like the 1% rule
« Reply #74 on: November 26, 2020, 08:13:24 AM »
Hopefully newbies will read this thread critically and learn something, that's all I have left to say. I don't think anyone's mind has been/will be changed.

Good luck going forward, OP.

-W

arebelspy

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Re: This is why I do not like the 1% rule
« Reply #75 on: November 26, 2020, 10:57:34 AM »
Was tagged (thanks!), read thread. Just a couple comments.

He used excess W-2 income to buy more rentals.

Correct.

Quote
Based on what I remember they were making 75K, living on 35K and using the difference to buy more rentals.

We earned more (mostly via side gigs) and spent less, but conceptually that's basically it. Spend less than we earn, plow the rest into rental real estate.

We definitely are not an example of "make initial investment and never add any"; by the time we FIRE'd in June 2015 we had invested ~300k across ~6 years, it had grown to over 1MM and were cash flowing more than enough to cover expenses.

At that point, IIRC, we were at about 80% equity position (20% LTV), having massively deleveraged for FIRE income security. In the years since we've seen appreciation and done some 1031s into a few more properties.

Quote
You are claiming 15,000/month, after 13 years with with an initial investment of $50,000.

I didn't quite see that claim (specifically regarding the initial investment), though I did see the claim of if you had bought 1% properties that's what your cash flow would be. Too many assumptions to say what is correct or not about that statement (for one assuming a 1% property's rents rise in relation to its value).

I'm wondering where the 50k initial investment number came from. Did you initially invest 50k, and never invest any more, which turned into those 3 rentals worth 1.5MM?

I have no opinion on your personal investment story, other than to say congrats, seems like you did well! I agree that others should be cautious trying to follow the same path, but they should also be cautious trying to follow my path, or anyone's. Best to learn many different ideas and figure out what they think is best. Plenty in this thread for them to digest on both sides.

Would you/could you repeat this, starting now?

This, to me, is the key question, and one I've thought about a fair amount for my own situation.

I think large parts of my path could be repeatable, but other parts could not (or couldn't be counted on, and who knows how or if they'd happen, e.g. certain appreciation that wasn't counted on but was fortunate).

That question though, that's the ultimate one when evaluating one's investing history.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Archipelago

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Re: This is why I do not like the 1% rule
« Reply #76 on: November 26, 2020, 11:02:29 AM »
Clarkfan,

First, I need a sincere apology from you for posting that stupid youtube link. It's about this 40 year old who owns 4 properties  (first property bought in 2005 btw) with a combined worth of barely 1 million, but with about 750k in mortgages. She also has 200k in stocks. that is nowhere near 0 to 2 million in 15 years. I hope she's your wife or friend that you just wanted to plug and not someone you take advice from. Shame on me for clicking.

Second of all, I understand that you want to discuss the concept and not your personal holdings, but the more details you provide, the less attractive your real estate holdings are. You are attempting to paint this very rosy, easy, hands off picture of real estate (and a cash cow) and it's simply not true.

It sounds like your total cash flow for all of your properties is 2200/month! That's with self-managing and your 0 vacancy and very very low repairs/maintenance estimates. On 3 properties worth 1.5 million? Clark, this is exactly why people are preaching the 1%. If you would have stuck to better purchases, you would be cash flowing 15,000/month. You also haven't answered why you are so focused on appreciation if you don't want to sell. It does nothing for you. The bottomline is 2200 cashflow (without any major vacancies or repairs) on homes valued at 1.5 million.

I'm on your side and trying to support your concepts, but you gotta give me something to work with.

"If you would have stuck to better purchases, you would be cash flowing 15,000/month"


Please explain to me how I get to 15,000/month of cash flow in 13.5 years based on an initial investment of $50,000. After year 8, start deducting $750/month of cash flow for living expenses. You are making very strong claims that I could have done better with sticking with the 1% rule. As a result, I am simply asking that you support it with math.

I never made any claims about stocks, so I do not understand why you feel entitled for an answer regarding stocks. We are not talking about stocks. But fine, we have around 140K of index funds in retirement accounts.

I also didn't buy real estate in 2009-2010 as everyone is claiming. I bought in 2007, 2012, 2018 and 2019. My first purchase was May 2007. Based on national trends, this is technically the worst time to purchase a house because it was right before everything collapsed.

Part of the reason why my cash flow is low is because I did two major cash-out re-fi's to buy more real estate. For example, my original mortgage for Fort Collins was $950/month, then slowly increased to $1050 with increases in taxes. I did a cash out re-fi and pulled out 148K and my payment went up to $1650/month. However, I used the money to buy Kauai which increased from 660K to 900K in 2.5 years. I don't understand how this is a bad decision.

I have been on here since 2014 sharing my story. In 2017 my net worth hit 500K and I was asking for ideas on how to get to one million. I suggested real estate and many here shouted from the rooftops that it couldn't be done. I was told the party was over. Now in 2020 our net worth is 925K and people are telling me that I made a mistake. I should have bought better properties more consistent with the 1% rule. 

Yes, we are in agreement that we made money. However, we are not in agreement that I would have done better by sticking with the 1% rule. This is what I am arguing against. Show me how I get to 755K of real estate equity in 13.5 years with an initial investment of 50K and then start deducting $750/month for living expenses at year 8. Our current cash position of 42,000 is a direct result of a cash-out re-fi on a rental in 2019. We took out 107K out of the Florida house. We used 60K to buy our primary house and we had 47K of cash left over.

From my perspective, this has been frustrating because no one will support the 1% with math for wealth generation. Until someone does that, I think we will continue to go in circles. 

One more thing. I do not remember specifically who said what. But when arebelspy was doing his thing in 2014, the majority of people on MMM were not supportive of his plan. I'm not sure if those people are still here or left. Six years ago he was considered to be a reckless idiot gambling with real estate in Vegas. Now in 2020, he is considered to be a genius. I think I was one of the few that was supportive of what he was doing because I was doing something similar in Florida at the same time.

I am here to learn. I am listening. Teach me.

Quote
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?

Rent: $4450
Mortgage: $2675
Expenses: $775
Cashflow: $1000/month

Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 6.5%


Rent: $6700 (1% rule)
Mortgage: $2675
Expenses: $775
Cashflow: $3,250

Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 21%

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #77 on: November 26, 2020, 11:17:57 AM »
Clarkfan, I appreciate your response. I really do. We do seem to be going in circles.

The cash out refinances definitely helps explain why your cashflow is lower. With that new information. I would say you have done a fine job.

1. Obviously I'm asking about stocks because having 100% of your net worth in real estate would be concerning to me.
2. All we are saying is that if you would have bought another home in Florida or Colorado or even Kauai that was closer to the 1% rule, you would have had the same exact appreciation, but with higher cashflow. You seem to think that the homes you purchased were somehow magical and the best possible ones. No, all they have in common is that they appreciated (but so did every single other home in those areas) and you were able to cash out refi. This will not continue forever.
3. You keep refusing to answer what your end goal is and this is big imo. Appreciation on paper is a nice psychological boost, but if you aren't going to sell, then it means nothing. All that matters is cashflow. Curious, are you looking to buy more?
4. And yes, I believe like arebelspy, there are others who stocked up during the downturn with 1%+ homes that now cashflow 10K plus. 

« Last Edit: November 26, 2020, 11:21:40 AM by lilbenny34 »

FIPurpose

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Re: This is why I do not like the 1% rule
« Reply #78 on: November 26, 2020, 08:05:44 PM »
I've appreciated this thread a lot. Most of the time I've thought about buying rentals, I just can't help but think that the added return just isn't worth the work. Especially for the prices that most real estate is at now.

However, I have thought that maybe I would strategically like to own a rental or two in areas that I would enjoy living at. (Something either like a 6 months on; 6 months off kind of deal). At least that way I could consider the work/ smaller return I get on the property more of a luxury rather than trying to find a property that is a 100% investment purpose.

Every time I think about buying rental property, I just can't overcome the additional labor and risk. Then again, I'm more of the MMM route of making a good salary where I'll be FIRE at around 9 years of total work with no need to be a property manager afterwards. Perhaps I could've done it faster if I played my cards better or didn't make a dumb investment or two early on. But all-in-all I can't complain to only being done after 10 years.

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #79 on: November 27, 2020, 08:53:33 AM »
I've appreciated this thread a lot. Most of the time I've thought about buying rentals, I just can't help but think that the added return just isn't worth the work. Especially for the prices that most real estate is at now.

However, I have thought that maybe I would strategically like to own a rental or two in areas that I would enjoy living at. (Something either like a 6 months on; 6 months off kind of deal). At least that way I could consider the work/ smaller return I get on the property more of a luxury rather than trying to find a property that is a 100% investment purpose.

Every time I think about buying rental property, I just can't overcome the additional labor and risk. Then again, I'm more of the MMM route of making a good salary where I'll be FIRE at around 9 years of total work with no need to be a property manager afterwards. Perhaps I could've done it faster if I played my cards better or didn't make a dumb investment or two early on. But all-in-all I can't complain to only being done after 10 years.

I think your post regarding lifestyle is a huge consideration. Yes, for VTSAX, it's all about the numbers. However, for rentals there are many other things to consider besides return. These rentals have the opportunity to positively and/or negatively impact your life beyond the returns and those things should be considered and weighted. Below are some pros and cons.

One, I really enjoyed live-in flips that that were slow (6 months) and mostly cosmetic. I like the convenience of working on your own house. You don't have to travel anywhere. Additionally, for a live-in flip, I would not enjoy living in a construction zone. Full disclosure, for the Kauai house, I did gut the basement mother in law suite down to the studs. It was a construction zone. However, this was completely separate from our living space, so it didn't negatively influence our lifestyle, in my opinion.

Two, when you live in the house for 1-4 years and then convert it to a rental, you fix as much as possible before it becomes a rental. If you fix everything, repairs are going to be very minimal for the next 5-10 years as a rental. You get rentals with less headaches, in my opinion.

Three, I fly to Florida twice a year to see my parents. On each trip, I typically do 1-2 days of landscaping and updates, 4 hours each day. I think the winter trip typically has more value than the summer trip. Both are fun, but we really enjoy getting a few days of warm weather in December/January, now that we are back in Colorado full-time.

Four, I fly to Kauai 2-3 times a year to surf with my friends. I typically do 3 days of landscaping and updates, 4 hours each day. 

Five, I drive to Fort Collins, CO about 3-4 times a year for repairs and updates. The house was built in 1967. Based on it's age, it does have more stuff that breaks. However, the juice has always been worth the squeeze. The rental demand for this house is off the charts. It's about half a mile from Colorado State University (35,000 students). Small homes on big lots are getting demolished and replaced with apartments. Single family homes near campus get premium rent because of high demand and low supply. It's a 3 hour drive from my house, but only 45 minutes from additional family, so I plan my trips to Fort Collins when we are visiting family. It is very common for my wife and son to join me in Fort Collins after I'm done at the house. We typically go to a park and then a brewery. My son took his first steps in the grass at New Belgium Brewery in Fort Collins, CO on a perfect summer afternoon after I got done with some minor repairs at the rental house. It was one of the best days of my life and it included 2-3 hours of work at a rental.


Quote
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?

Rent: $4450
Mortgage: $2675
Expenses: $775
Cashflow: $1000/month

Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 6.5%


Rent: $6700 (1% rule)
Mortgage: $2675
Expenses: $775
Cashflow: $3,250

Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 21%
[/quote]


This is really helpful. I was really struggling with the math. Thank you for providing. This definitely solves everything.


Clarkfan, I appreciate your response. I really do. We do seem to be going in circles.

The cash out refinances definitely helps explain why your cashflow is lower. With that new information. I would say you have done a fine job.

1. Obviously I'm asking about stocks because having 100% of your net worth in real estate would be concerning to me.
2. All we are saying is that if you would have bought another home in Florida or Colorado or even Kauai that was closer to the 1% rule, you would have had the same exact appreciation, but with higher cashflow. You seem to think that the homes you purchased were somehow magical and the best possible ones. No, all they have in common is that they appreciated (but so did every single other home in those areas) and you were able to cash out refi. This will not continue forever.
3. You keep refusing to answer what your end goal is and this is big imo. Appreciation on paper is a nice psychological boost, but if you aren't going to sell, then it means nothing. All that matters is cashflow. Curious, are you looking to buy more?
4. And yes, I believe like arebelspy, there are others who stocked up during the downturn with 1%+ homes that now cashflow 10K plus. 

1. Yes, stocks matter to overall portfolio, but I don't think they are relevant when comparing different types of real estate.

2. No one is perfect and you can always do better. About 5 years ago, I looked at the comps for my Fort Collins house based on tax records. I bought at 182K. Out of 50-100 sales, I only found one other person who bought lower than me and it was at 177K. I'm pretty confident that I bought in the top 10% of best deals. Yes, I could have maybe gotten a tiny bit closer to a 1% deal, but I was still pretty far away from 1% deal because my 182K house only rented for $1300/month at the time. A 1% deal for a single family home hasn't existed in that neighborhood for 20 years. There were times were you could get close to a 1% deal with a condo/apartment in that neighborhood. However, those have appreciated less and with HOA fees, it kills your cash flow.

To get to the 1% rule, you would have to go to a different neighborhood and those neighborhoods have less appreciation. I agree that the neighborhood appreciated the same. I can actually buy 1% rentals today in my home county (Pueblo County). I can buy something with 60-70K cash, put in 10-20K worth of work and rent for 700-900/month. However, these homes do not appreciate because they are in high crime areas with bad schools. This would be a major hit to my lifestyle.

One more thing regarding my Fort Collins house that is relevant. My lot size is 12,007 sq. ft. You can subdivide the lot at 12,000 sq. ft. Only about 5% of the lots in that neighborhood are greater than 12,000 sq. ft. In about 10-15 years I am going to knock down the house and build two. I'm not sure how you calculate that in your numbers, but I think it's relevant.

3. I avoided answering many questions on this thread because I thought we were going into circles. I thought it was better to try to stay focused on one debate at a time. I am probably not going to do a good job of answering your question, but this is my best attempt. In 2007, my original plan for an "end goal" was 4 rentals at 250K each that each cash flowed $500/month. I would use the money for retirement and international travel. I was going to buy one rental every 7 years with cash flow and be done by age 50. Due to larger appreciation and lower interest rates, I deviated from the plan and did cash-out re-fi's. I got to my goal of 4 rentals and $2000/month of cash flow about 10 years earlier than I thought. Technically, I have achieved my end goal. I pretty much have my perfect life and I am not looking for any major changes. The only thing I am lusting after right now is getting a vacation rental in the mountains. I love to snowboard and I think a vacation rental near Breckenridge would be fun. However, I am not willing to accept headaches. As a result, I will probably be super conservative and wait until I have more than enough money to pull it off.


4. Yes, arebelspy just said he put 300K of his W2 income into his rentals. My original investment was 50K. It would make sense for his cash flow to be higher because he allocated 6 times as much capital.

I'm sure many of you make more money than us at your W2 jobs and would prefer to put it into VTSAX. This probably makes rentals less appealing to you. However, I make 52K /year and my wife makes 13K/year, so our combined W2 income is 65K/year. I am not complaining. When you add the rentals (cash flow, appreciation, principle pay down and tax advantages), we have more than enough. I am just saying that this makes more sense for us. We also have the time to do it. I work 1,100 hours/year and my wife works 780 hours/year.


I will admit that the 1% rule has it's place. Looking back, I could have done a better job of acknowledging it's value before I attacked it. However, I personally think we put too much emphasis on it at times and that is why I am pushing back. It's relevant, but it's not the only way. I don't want to guide newbies into bad neighbors to achieve the 1% rule. Is that really the end goal? Yes, some people might do very well with bad neighborhoods. I could see that being a niche. However, you would have to have some major systems in place to deal with the problems that come up.
« Last Edit: November 27, 2020, 09:14:02 AM by clarkfan1979 »

waltworks

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Re: This is why I do not like the 1% rule
« Reply #80 on: November 27, 2020, 09:10:23 AM »
Deleted previous post because it's too harsh. I'll restate.

In your shoes, OP, I'd put some (or all) of that equity to work to make your life more awesome and let you and your spouse work less and spend more time with family, as you've mentioned is a goal. You are betting everything on RE, which has worked great so far...but might not going forward. I'd take a hard look at your situation before continuing that strategy. I followed almost an identical trajectory (started from zero NW in 2008 or so, only made it above grad student/postdoc salaries in the last 5 years, invested in RE - as well as stocks) - but I sold the RE when it had appreciated beyond what made sense as an investment. Now I'm comfortably FI.

You have won the money game, so if you're not living the life you want, look hard at how you can make your money work better for you.

-W
« Last Edit: November 27, 2020, 09:52:54 AM by waltworks »

Dicey

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Re: This is why I do not like the 1% rule
« Reply #81 on: November 27, 2020, 09:43:24 AM »
Ouch. I am fans of both of you and have quite enjoyed this discussion, but the quoted comment above is unduly harsh, IMO. In fact, I'm not going to quote it after all, in hopes you'll reconsider, @waltworks .

waltworks

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Re: This is why I do not like the 1% rule
« Reply #82 on: November 27, 2020, 09:53:14 AM »
Ouch. I am fans of both of you and have quite enjoyed this discussion, but the quoted comment above is unduly harsh, IMO. In fact, I'm not going to quote it after all, in hopes you'll reconsider, @waltworks .

Thanks Dicey. Appreciate the nudge.

-W

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #83 on: November 27, 2020, 10:00:12 AM »
All I can take away from this is; 13 years of investing, ~$1 million in RE equity, wife works at Target to make ends meet.

SMH.

-W

13.5 years of real estate investing, 755K of RE equity, wife works at Target because she likes it*. Wife quit her high stress full-time job in 2015 because she didn't like it and we had enough rental income to support our lifestyle.


I think Walts comment was fair. I can see the concern about the comment, but I didn't take it that way. I think my position does warrant additional clarification. In an attempt to be fully transparent, I was on this forum in September 2019 with a temporary low cash problem.

*We had recently moved from Hawaii and lived in Pueblo for 2 months and my wife wanted to buy a specific house that she 100% loved. Our current rent was $800/month but the rental some issues with cigarette odor coming from the floor. I think the owners tried to hide it with floor cleaner when we looked at the rental. I wanted to wait a year to get our reserves back up before we bought another house. We were low on cash at the time (15K) because we just got done rehabbing the Kauai house. We asked the landlord if we could get out of the lease due to the smoke and they can keep our deposit. They agreed.

My wife wanted to re-fi the Florida house to come up with the down payment to purchase the new primary home. This would increase the payment by $500. Then our house payment would be $1275, which is $475/month higher. Add another $125/month for repairs and another $100 for higher utilities. This house purchase would reduce our cash flow by $1200/month. I flat out told my wife that if she wanted to buy this house she needs to (A) decrease her fun money spending from $1000/month to 500/month or (B) add $500/month of income. She only had to do this for 12 months, while we got our reserves back up. Because she likes Target so much, she decided to get a job at Target, instead of decreasing her spending. Our son was 2 years old at the time. She also thought it would be good for her mental health to get some adult time away from our son.

Well, it didn't take 12 months to get our reserves back up. It was more like 3-6 months. One of the biggest reasons was because the Fort Myers house appraised higher than we thought. After our reserves were back up, I told her that she doesn't have to honor the original agreement of 12 months. She can quit at anytime. However, she likes Target more than staying at home, so she continues to work at Target. However, about one month ago, Target got a new store manager and it has been less fun. She doesn't have any direct contact with the store manager, but he has been less accommodating with her weekly schedule and vacation time. She got the time off, but he gave her a hard time about it. She might quit in the next 1-2 months, but it's up to her.

Maybe these details don't matter, but this is my attempt to be fully transparent.
« Last Edit: November 27, 2020, 10:09:52 AM by clarkfan1979 »

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #84 on: November 27, 2020, 12:47:50 PM »
Clark,

I appreciate your level headed comments. I appreciate your patience with us nosy folks.

one more question:

How did you turn the 50K initial investment into the rest of the properties. If your first one was 2007, then it must have took a dive the year after and remained low for a long time. You also would have had to put some cash into the property to fix it up as you were cashflow negative at the start (or at best neutral). Then you bought again in 2012 (a cheaper house so I could see how it would be a small down payment), I'm assuming you bought it by cash out refinancing the CO home. but then in 2018 you bought a very expensive house compared to your income and even with a cash out refi from your 2nd home, I don't see how that would be sufficient (i could be way off). Then finally, you bought your current home by cash out refinancing the 2nd home, so did you do it twice? Just trying to follow. You keep saying that you made 50K into 4 properties so I would like to see how that occurred (not saying you aren't being truthful)

I also don't think people have given you enough credit for our 2018 purchase. That seems to be a huge part of your profit (and net worth) and you purchased that in 2018 when I and most others would not have pulled the trigger. On the flip side, we are saying that you may want to strongly consider selling to de-leverage yourself and enjoy your winnings, you already won, don't push your luck too far. If I'm reading this correctly, your household income is basically 50k and you have $6000+ worth of PITI payments not including property tax, maintenance, etc.? That's pretty leveraged despite your positive cashflow. I'm sure the stress last year with the shortage of funds wasn't fun considering you are rich on paper. I do agree with Walt that you can have a less stressful life and have more freedom if you deleveraged a bit. I'm still not sure how you travel to hawaii and florida x2 year plus snowboard and surf on that income unless you are living above your means or secretly richer than you are letting us on. But feel free to not answer the last part as I know we are too off topic at this point.


clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #85 on: November 27, 2020, 05:40:09 PM »
Clark,

I appreciate your level headed comments. I appreciate your patience with us nosy folks.

one more question:

How did you turn the 50K initial investment into the rest of the properties. If your first one was 2007, then it must have took a dive the year after and remained low for a long time. You also would have had to put some cash into the property to fix it up as you were cashflow negative at the start (or at best neutral). Then you bought again in 2012 (a cheaper house so I could see how it would be a small down payment), I'm assuming you bought it by cash out refinancing the CO home. but then in 2018 you bought a very expensive house compared to your income and even with a cash out refi from your 2nd home, I don't see how that would be sufficient (i could be way off). Then finally, you bought your current home by cash out refinancing the 2nd home, so did you do it twice? Just trying to follow. You keep saying that you made 50K into 4 properties so I would like to see how that occurred (not saying you aren't being truthful)

I also don't think people have given you enough credit for our 2018 purchase. That seems to be a huge part of your profit (and net worth) and you purchased that in 2018 when I and most others would not have pulled the trigger. On the flip side, we are saying that you may want to strongly consider selling to de-leverage yourself and enjoy your winnings, you already won, don't push your luck too far. If I'm reading this correctly, your household income is basically 50k and you have $6000+ worth of PITI payments not including property tax, maintenance, etc.? That's pretty leveraged despite your positive cashflow. I'm sure the stress last year with the shortage of funds wasn't fun considering you are rich on paper. I do agree with Walt that you can have a less stressful life and have more freedom if you deleveraged a bit. I'm still not sure how you travel to hawaii and florida x2 year plus snowboard and surf on that income unless you are living above your means or secretly richer than you are letting us on. But feel free to not answer the last part as I know we are too off topic at this point.

I agree with your comments regarding diversifying going forward. I am currently in the process of buying more index funds with my rental cash flow. However, I was defending myself for my previous behavior.

For the next 6 months, my focus is on refinancing all my properties to get lower rates. My payments are going to drop by $860/month. My Kauai property taxes will increase by $360/month, so it's a net gain of $500 of cash flow. I think my monthly principle pay down is going to increase from $1600/month to $2,250/month across the 4 properties.

I bought rental #1 in May 2007 as a primary residence and I got 3 roommates. The 20% down payment and closing costs were around $40,000. I spent around $10,000 over the next 4 years on repairs, for a total initial investment of $50,000.

The original mortgage was $1040/month based on a 6% loan. I refinanced in June 2009 into 4.75% and the payment dropped to $950/month. I collected $350/month per room for a total of $1050/month. I lived in the 4th bedroom for free. I actually paid myself rent of $350/month and applied it to the mortgage, so I had an extra $350/month going toward principle. When I did a straight re-fi in 2009, I think I got a refund check for like $10,000. I kept that in the bank and continued to make extra mortgage payments

In reality, I moved to Florida with $10,000 in the bank, mostly from the refinance. The math is messy because I lived in the house. If I didn't live in the house, I think it would be reasonable to argue for more profit. The average mortgage payment was $1,000/month and total rent collected (including myself) was $1400. This is a cash flow of $400/month for 50 months ($20,000). Vacancy was zero, but repairs were not zero. I spent $10,000 on repairs over the 50 months that I lived there.

I bought rental #2 in Florida for $95,000 with 5% down in 2012. For 2012, I had $10,000 from the Fort Collins refinance + another $3,600 in cash flow. I needed $9,000 to close and $4500 on immediate repairs, so that's $13,500.

I spent another $11,500 on repairs for Florida over the next 3 years. My cash flow from Fort Collins was $4200 (2013), $7,200 (2014) and $10,200 (2015). This totals $21,600 to pay for the $11,500 in repairs, so I have a surplus of $10,000. I increased the rent from $1450 to $1900 in August 2014 with new tenants. I didn't raise the rent in 2012 and 2013 and it was a huge mistake. 

We moved to Kauai in 2015. From 2015 to 2018, I was averaging a cash flow of 1,150/month for Fort Collins and 950/month for Florida. This totaled $2100/month. My wife quit full-time work and we started to draw around $750/month of rental income for living expenses. We have our $10,000 excess from Florida + 16K/year in cash flow over 3 years for a total of $58,000.

We did a cash-out re-fi on Fort Collins and pulled out $148,000. This totals $206,000. We spent $183,000 on the Kauai house and we are left with $23,000.

In 2019, we moved back to Colorado. We did a cash out re-fi on Florida and pulled out 107K. We needed 62K to close on our current primary home. (107) + (23) - (62) = 68K. My current equity position is 755K. However, after this math, I have an extra 68K. That is currently in cash and stocks. My total net gain from real estate is 755 + 68 = 823. This also does not account for the $750/month of rental cash flow that we spent on living expenses for the past 5.5 years which is around 50K.   

I apologize. This is really fucking messy. However, I don't want to spent any additional time on it.

 
« Last Edit: November 27, 2020, 05:48:42 PM by clarkfan1979 »

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #86 on: November 27, 2020, 06:43:24 PM »
Our current income is 52K for me + 13K for my wife and 27K for rental income for a total of 92K. However, our rental income should go up another 6K in about 6 months after I get done with all the refinances.

I am super thankful for this MMM website and forum because it has really helped me achieve my lifestyle goals, on the cheap. Most of these ideas are from MMM himself, so I cannot take personal credit.

1) Job: Teaching community college is awesome. My friends that teach at 4-year Universities might laugh at me because I have less social status, but I think I have a much better overall lifestyle. Based on my contract, I work 40 hours a week for 32 weeks for a total of $1,280 hours/year. I've been doing this for a few years, so I average 1100 hours/year. I am contractually obligated to be on campus 30 hours/week for 32 weeks, so the lowest I can get is 960 hours/year. I contribute 13% of my salary into a 401a retirement account. My employer contributes 13.15%. 

My son get free tuition at any of the 13 Colorado Community colleges until he is 25 years old. Many of the community colleges now offer 4-year degrees and I think 4 of them have dorms if he wants to live there. I will probably still do about 50K into a 529K, but I think that will be for grad school if my son wants to go. I am not offering him any support for undergrad because it's free. He can get a part-time job for his living expenses or live at home.

The local K-12 schools are not open on Fridays. They are only open M-Th. Dad doesn't teach on Fridays. I am hoping for many fishing, hiking and snowboarding adventures with my son on Fridays. He is only 3 right now, so we stay pretty close to home. However, I am very much looking forward to the next couple years.

2) Primary Housing: I am currently refinancing into a 2.875% mortgage. My loan is 227,000. My PI is 942 + 115 for taxes and 95 for insurance for a total PITI of $1152/month. Utilities are also super low for a 2,500 sq. ft. house. My gas bill for heat was $48/month in the dead of winter.

3) Cars: I drive a 2007 Pontiac Vibe that I bought for $2,750. It's actually the same car as the Toyota Matrix. MMM puts them into the same category, but the Pontiac Vibe is much cheaper. Probably 60 cents on the dollar b/c of the name. Insurance is $37/month. I average 32 mpg per tank (80% highway). 

4) Credit Card Points: From 2015 to 2019, we primarily used the Alaska Credit Card to fly back and forth between Denver and Kauai. We would take 3 trips/year (6 flights total). It should cost us $4800/year, but with the $99 companion fare and points, it cost us $1800. We saved $3000/year with this card.

5) Southwest Card: I got the companion fare in April 2019. We ended up with $185,000 points. All three of us are flying to Kauai round trip November 30 - December 10th. It cost 46,000 in points for all 3 of us.

6) Kauai trips: We normally stay with friends, but due to COVID-19 we booked an airbnb.com for $1300 for 10 nights. We will still hang out with our friends, but we will mostly do outdoor activities together from a distance. I bought a 2003 Honda Oddessey for $3,000 last January. I keep it stored in the backyard of our rental. Our 10-day trip is going to cost around $1500.

We have a 7-day trip planned for March for spring break with friends. We are splitting a 2-bedroom. For 7 nights, it's $690 for each couple. We used points for one-way. I actually paid $818 for the return flight for 3 of us. However, I think I can re-book for around $500-$600 total and get a credit for the difference.

We also have plans to stay at our rental house on Kauai in between tenants.

7) Snowboarding: I live 2 hours and 15 minutes from Breckenridge. It costs me about $18.00 in gas per trip. The season pass cost me $700. If I get 30 days, I will spend $540 on gas and $700 on the pass for a total of $1240. My gas bill would normally be less because I would ride share with friends to the mountains. However, due to COVID-19, we are not doing that. I still meet up with friends on the mountain and hang out from a distance, but we don't drive in the car together.

I am 41 years old and the drive is starting to bother me. It never did before. I really want to buy a vacation rental in the mountains, but I need to be smart about it. I want to rent it during peak times and use it during off-peak. I think I should try to split the purchase with another ski friend or maybe two of them, so we can share the vacancy days. If we have 40% vacancy that would be 146 days. I could probably use the rental for 50 days of vacancy for personal use, but not 146 days.

I used to ride A-Basin until the first week of June every year and sometimes as late as 4th of July. I've done that twice. A-Basin broke away from Vail Resorts, so they are no longer included on the pass. Breckenridge is now committing to staying open later in the year. In 2018, the last day was June 9th and I was there.

I have friends on Kauai that ski 35 days/year. They go to Tahoe for 5 trips and ski 7 days straight and fly back. It's weird that my Kauai friends get more days on the mountain than me. They might not get their 35 days this year with COVID-19. They didn't get it last year. 

8) Golf: I want to get a season pass next summer for $550/year for my local course. They actually still charge you $14 for each round after the season pass to walk. If I get 30 rounds of golf, it will cost me $970/year. I wanted to pull the trigger on this last year, but I chickened out. Will next year be different? We will see...

9) Taxes: With our relatively low income, real estate deductions and one son, I think we will pay around 3% in federal tax in 2020. Our property taxes are $1380/year on a house worth $310,000. The schools are good, but the roads suck. I can deal with that. Local sales tax is 4% on consumer goods, and 0% for groceries. 

« Last Edit: November 27, 2020, 06:52:26 PM by clarkfan1979 »

waltworks

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Re: This is why I do not like the 1% rule
« Reply #87 on: November 27, 2020, 06:52:54 PM »
I think, interestingly, that sort of sums it up, when a 4.5 hour car trip is something you think costs $18. That tracks with how you analyze your rentals pretty closely, in that, in my world, it ignores long term costs/maintenance/opportunity cost.

Congrats on living the life you want, best of luck going forward. 

-W
« Last Edit: November 27, 2020, 07:25:02 PM by waltworks »

PMJL34

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Re: This is why I do not like the 1% rule
« Reply #88 on: November 27, 2020, 09:13:23 PM »
Clark,

I enjoyed your write ups and thanks for sharing an insight into your frugal living as well as explaining how you bought your properties.

I live frugally as well so can definitely relate with the basic car, travel points, and more. You're lucky you aren't in Cali, everything has been shutdown since March and I'm not hopeful that I will get to snowboard this year. I will most likely visit Hawaii this spring break for a much needed vacation with the family. Hopefully resume international travel this summer.

I would love to be a teacher for the time off, a very underrated profession. I'm jealous. I do have and enjoy a 4 day work week, but even that is not enough time off for me.

I think Walt said it best, but you seem to be oversimplifying your finances (A LOT). In no universe is 4 hour trip $18. If you had an excel sheet of every dollar in vs out, it would most likely paint a very different financial picture.

For starters, spending 40k on your first home and living with 3 roommates is not positive cashflow. That is just having a side hustle of living with roommates and charging them rent. Even by your own account, your roommates paid for the mortgage, but that doesn't include the 10K improvements, property taxes, insurance, utilities etc. This means that you were pumping in extra money (of your own) into the house from the very get go. You did the same at every other house you bought and I could continue to give you examples, but I don't think that's helpful/necessary. But the point is, I do feel that you are not trying to be deceptive, it's just that you don't track your dollars very closely. FYI there's nothing wrong with that. I wish I could be less OCD about my money.

Simply put, if you are claiming that you haven't put a penny into all 4 of your homes since the original 50k and that you had positive cash flow every year, plus your full time job, your wife's on and off income, plus low taxes, plus living frugally for a full 13 years....then there is no way in hell you would have been in a financial pinch when you moved back to Colorado (in 2018?). It also sounds like you are actually subsidizing your own life expenses through the cash out refis. If you were cashflow positive and working full time, then each new purchase should have come from your own savings, instead it required a cashout refi every time (or as you say a 10k refund for a refinance. lol no one gets paid 10k to refinance, I can guarantee you that your loan increased in that same amount plus the cost of refi).

It sounds like you met your financial/real estate goal 10 years ahead of time (huge kudos), but don't have a current plan now/going forward except for riding the appreciation wave. Maybe it's time for you to sit down and figure out what you want to accomplish in the next 10 years. I do support you diversifying into mutual funds. 

With all that said, I think you have a lot of things figured out and I applaud you.


arebelspy

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Re: This is why I do not like the 1% rule
« Reply #89 on: November 28, 2020, 01:34:47 AM »
Summary: Large amounts of leverage (5% down multiple times, cash out refis to continually get that 5% down for the next) + time (appreciation) = wealth. Properties that were not great numbers initially eventually become decent a decade or so later.

It's certainly one path, and one a lot of people take. It takes very little capital, just good credit, and very little work (you're only buying a small number of properties) and can use leverage and time to create wealth.

Could it be done better or more efficiently by someone putting in the time and effort to become a (semi?) professional and get better deals? Certainly.

Can you get wealthy over time by taking cheap money from the bank on a solid (perhaps even boring) rental and holding it for a decade? Yep.

I think if the average person put 5% down on a house that was breakeven (assuming they did actually count all maintenance/repairs/capex/etc. correctly) and held it for a decade+ with a fixed, low rate mortgage, they'd see rents rise, while their P&I remained fixed and even if appreciation was low (say, at inflation, no higher), they'd still see large equity growth due to the magnification of leverage on that appreciation. If they did that 3-4 times, 10+ years later they'd have a decent net worth and okay cash flow.

And certainly people who know better could say to them "you could have done so much better" or even "you still could be doing so much better," and they'd be right. But also, they could be like most people and do nothing. It's the overwhelmingness and fear that keeps a lot of people out of rental real estate, and if a simple path of buying on the MLS with bank money and counting on long term appreciation and small cash flow is the one that works for you, then great.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
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clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #90 on: November 28, 2020, 06:53:26 AM »
Clark,

I enjoyed your write ups and thanks for sharing an insight into your frugal living as well as explaining how you bought your properties.

I live frugally as well so can definitely relate with the basic car, travel points, and more. You're lucky you aren't in Cali, everything has been shutdown since March and I'm not hopeful that I will get to snowboard this year. I will most likely visit Hawaii this spring break for a much needed vacation with the family. Hopefully resume international travel this summer.

I would love to be a teacher for the time off, a very underrated profession. I'm jealous. I do have and enjoy a 4 day work week, but even that is not enough time off for me.

I think Walt said it best, but you seem to be oversimplifying your finances (A LOT). In no universe is 4 hour trip $18. If you had an excel sheet of every dollar in vs out, it would most likely paint a very different financial picture.

For starters, spending 40k on your first home and living with 3 roommates is not positive cashflow. That is just having a side hustle of living with roommates and charging them rent. Even by your own account, your roommates paid for the mortgage, but that doesn't include the 10K improvements, property taxes, insurance, utilities etc. This means that you were pumping in extra money (of your own) into the house from the very get go. You did the same at every other house you bought and I could continue to give you examples, but I don't think that's helpful/necessary. But the point is, I do feel that you are not trying to be deceptive, it's just that you don't track your dollars very closely. FYI there's nothing wrong with that. I wish I could be less OCD about my money.

Simply put, if you are claiming that you haven't put a penny into all 4 of your homes since the original 50k and that you had positive cash flow every year, plus your full time job, your wife's on and off income, plus low taxes, plus living frugally for a full 13 years....then there is no way in hell you would have been in a financial pinch when you moved back to Colorado (in 2018?). It also sounds like you are actually subsidizing your own life expenses through the cash out refis. If you were cashflow positive and working full time, then each new purchase should have come from your own savings, instead it required a cashout refi every time (or as you say a 10k refund for a refinance. lol no one gets paid 10k to refinance, I can guarantee you that your loan increased in that same amount plus the cost of refi).

It sounds like you met your financial/real estate goal 10 years ahead of time (huge kudos), but don't have a current plan now/going forward except for riding the appreciation wave. Maybe it's time for you to sit down and figure out what you want to accomplish in the next 10 years. I do support you diversifying into mutual funds. 

With all that said, I think you have a lot of things figured out and I applaud you.


The question was how do you afford your lifestyle, right? I answered it to the best of my knowledge. When I drive to Breckenridge, it costs $18 in gas. You did not ask me what are the total direct and indirect costs of driving a car. If you asked me a different question, I would get you a different answer. My main point is that I live close enough that I don't pay for lodging. However, the drive is starting to become less fun.

I agree that I might focus on the positives too much. I am a hardcore optimist. I know that this can be annoying sometimes. In an effort to talk about the dark side of real estate, I can give you two examples that were not fun.

One, in July 2019, I accepted a job to move from Hawaii back to Colorado to be closer to my wife's family. I was hired extremely late in the hiring cycle. I had 3 weeks to move and start a new job. Normal is 3 months. The part that made it less fun was that I still had a few house projects on the list. I like doing house projects, but it was not a leisurely pace. I did as much as I could during those 3 weeks and I paid someone to finish everything. It wasn't super stressful because I knew I could always pay someone to finish it and we had the money. However, labor in Hawaii is expensive and I wanted to do as much of it by myself as I could to reduce the cost.

Two, it was a stressful 60 days when my wife wanted to re-fi the Florida house and purchase our current primary home. After the appraisal came in higher than we thought, we had plenty of money to pull it off. However, it was just alot of paperwork and time. I just started a new job and I was probably working 50 hours/week. New textbooks, new software to learn, new office to set up, new campus... Add the re-fi and purchase on top of it and I was working 60-70 hours/week for about 60 days. Looking back, I think it was worth it. However, those 60 days were not fun.

For the most part, I think you have an accurate understanding of what I did. Before, I think there was some miscommunication. I don't really have any interest in arguing over the logistics of how you or anyone else categorizes everything.

As long as the readers understand and get something out of it, I'm happy.

I've been to Breckenridge twice this past week and I leave for Kauai for 10 days on Monday. Life is good.

clarkfan1979

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Re: This is why I do not like the 1% rule
« Reply #91 on: November 28, 2020, 07:24:16 AM »
Summary: Large amounts of leverage (5% down multiple times, cash out refis to continually get that 5% down for the next) + time (appreciation) = wealth. Properties that were not great numbers initially eventually become decent a decade or so later.

It's certainly one path, and one a lot of people take. It takes very little capital, just good credit, and very little work (you're only buying a small number of properties) and can use leverage and time to create wealth.

Could it be done better or more efficiently by someone putting in the time and effort to become a (semi?) professional and get better deals? Certainly.

Can you get wealthy over time by taking cheap money from the bank on a solid (perhaps even boring) rental and holding it for a decade? Yep.

I think if the average person put 5% down on a house that was breakeven (assuming they did actually count all maintenance/repairs/capex/etc. correctly) and held it for a decade+ with a fixed, low rate mortgage, they'd see rents rise, while their P&I remained fixed and even if appreciation was low (say, at inflation, no higher), they'd still see large equity growth due to the magnification of leverage on that appreciation. If they did that 3-4 times, 10+ years later they'd have a decent net worth and okay cash flow.

And certainly people who know better could say to them "you could have done so much better" or even "you still could be doing so much better," and they'd be right. But also, they could be like most people and do nothing. It's the overwhelmingness and fear that keeps a lot of people out of rental real estate, and if a simple path of buying on the MLS with bank money and counting on long term appreciation and small cash flow is the one that works for you, then great.

100% agree. Because you said it, the readers might give it more attention.

Let's not forget how much fear was in the world in 2009 and 2010. That is something that is very difficult to go back and measure. Anyone buying rentals during this scary time was most likely not getting support from their family and friends. They were going against the grain and could see the bigger picture.

Most people are too scared to do anything. That's fine. I'm not judging. However, I really do not want any advice from those who are too scared to take action. That really isn't helpful. If you have done a deal, please share your experience so we can all learn from it. 

I have a Ph.D. in Applied Social Psychology, which is basically Behavioral Economics. During my 7 years of grad school, I have read hundreds of research articles on how humans rationally and irrationally assess risk. Based on this knowledge, I definitely have more wins than losses. I am also willing to take more "risk" in the eyes of the average person, which gets me a higher return. However, for the average human, risk is mostly subjective, so in my opinion, I get higher returns without taking additional risk.

It is very possible to quantify risk. However, when I am competing against other people to buy an asset, I go for the asset that has tons of irrational risk to get it for a cheaper price. These are basically ugly houses that need new flooring, paint and appliances. My Pontiac Vibe would also count as getting a deal because people irrationally assess risk.

Someone else mentioned "risk" as being subjective. Thank you for that comment. I really wanted to run with it, but we were already pretty far off topic.   

I think I am going to put a rental portfolio binder together over the summer for my rentals. I am going to compare my returns to national metrics and more local neighborhood metrics. This should be a good measuring stick for how I have done. I am going to try to use the binder to get partners for a vacation rental in the mountains. If anyone has any advice, let me know. I have never done this before. 
 



innkeeper77

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Re: This is why I do not like the 1% rule
« Reply #92 on: December 07, 2020, 12:35:42 AM »
Summary: Large amounts of leverage (5% down multiple times, cash out refis to continually get that 5% down for the next) + time (appreciation) = wealth. Properties that were not great numbers initially eventually become decent a decade or so later.

It's certainly one path, and one a lot of people take. It takes very little capital, just good credit, and very little work (you're only buying a small number of properties) and can use leverage and time to create wealth

.  .  .  .

Thanks for posting this! My wife and I have been going back and forth as to whether our current house (Former hoarder house in the south Denver area we bought off market) should become a flip or a rental. Once I put a roof on it the maintenance should be minimal. We already have more appreciation than money we have put into the house, and the numbers keep looking "ok but not amazing" - we are happy with the very little work and our inital low down payment.

Your post was the first in a while that actually nudged me noticeably. This house will not make us FI, but it should be a net benefit and an OK hedge with very low initial capital needed (considering the rent we would have to pay otherwise)

You have certainly done a lot better than us in the years since I met you in Longmont, but we are OK, focused on market equities, but have rode the current RE wave. Our current house doesn't look like an amazing deal, but once you consider that we put 0% down on our first house and rolled over that appreciation each move, it looks OK to me. If nothing else, I don't expect this rental to LOSE money overall.