There are many different ways to make money in real estate. I am not advocating that my path is the "only path" or the "best path". I am simply advocating that it is "a path" I really struggle when people say that they won't even look at a deal if it doesn't meet the 1% rule. I think that is really short-sighted. If you want cash flow to quit your job, fine. However, if you are looking to build wealth, the 1% rule is not a very good metric.
If you want to build wealth, you should be buying assets that are highly valued. Warren Buffet attributes his success to his partner Charlie Munger for helping him change his investing philosophy. Instead of trying to get a "great price" on a "fair company", Charlie taught me to focus on getting a "fair price" on a "great company".
I purchased a primary home in June 2018 for 603K. I put in 50K of repairs and 7K of furniture. My mortgage is $2675/month with a rate of 4.5%. It's now a rental that gets $4450/month in rent. After GE tax ($180), utilities ($120), vacancy ($225) and repairs ($250) I get around $1,000/month of cash flow. I do get $700/month in principal pay down, but this deal is still very short of the 1% rule. Most people would tell me that this rental sucks, right?
https://www.bizjournals.com/pacific/news/2020/11/06/median-home-price-on-kauai-jumps-45-sales-up-37.html
I looked into rentals quite a bit, as I owned 2 of them at one point. The 1% works great for lower capital cost properties with a much higher % of repair and vacancy costs, overall. Once you get into the land value of homes being very high, some of your gains can come from the gradual increase in home value over time, lowering the 1% rule. This means that you need to be prepared to sell and get out when the values spike, then get back in later when prices stagnate. At MMM we don't generally like market timing, and a rental is fairly high-work to sell.
I think that in most markets a person who looks for a long time can eventually find a property that will pay out well, if managed well. Sometimes they are very hard to find.
With high value property (land value is high), lower turn over with less vacancy and repairs, you can break even at around 0.5% or 0.6%... if you assume the home will increase at the rate of inflation or just above (average rate). BUT, that does not pay me anything extra for my time to get it rented, time for repairs, to do my taxes, etc.
Your rate of 0.67% is not bad at all.
Take a look:
Opportunity Cost: $660k invested (let's assume no mortgage) x 5% a year net of inflation (average stock market) = $33k/yr =
$2,750/moIncome: $4450/mo
Your costs monthly: $775 + Property tax of I assume $425/mo = $1200/mo
NET: $3250
Based on this, you are getting $500/mo extra for your business compared to the stock market, or 1% better than long term average returns.
That 1% will pay for the selling costs after 6 years. AND If you keep the property a longer time, then the resale costs as a % will be lower.
I note that your maintenance costs are very very very very low for a rental that is vacant one month every 2 years, on what I assume is a SFR or a SFR with a secondary suite. This $3k/yr is the bare minimum of repairs just for the house, with zero replacement costs, and the rental turn over costs (paint, occasional new carpet or appliance, advertising) would be in addition, not to mention any tax accounting or minor legal help you need to run your business even with decent tenants.
Also - my insurance on a rental is close to $100/mo for a larger home, which may be missing from your numbers. So, I would add in another $3000/yr minimum to your costs, likely more, for turn over maintenance costs, and insurance.
End of the day (using no mortgage, comparing to conservative stock market) -- you are netting at least $250 before tax on the rental, to pay for your labor, risk and talent.
You are saving the property management fee of at least $350/mo by managing it yourself. So if you had a management company, this rental certainly wouldn't pay, partly because they hire full trades to do all repairs and you will be replacing that toilet ball valve yourself in your scenario.
If your rental home value increases rapidly, especially if it increased faster than the stock market, you will "win" even more.
If you end up with a lot more vacancy than expected or a few major repair items, or need to sell the home, removing any real estate gains due to commission costs, you may or may not win.
If you move away for an extended time and need to hire a property manager, you will not win.
Thoughts?