Author Topic: Those who call the 1% rule garbage?  (Read 7896 times)

Lan Mandragoran

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Re: Those who call the 1% rule garbage?
« Reply #50 on: May 10, 2017, 08:46:17 PM »
"Alright...  that was rather condescending. I'll just not post here and you can have your unchallenged assumptions verified."

Some of your statements indicated to me you might not fully understand the math.

I place little weight on what Coach Carson says.  He's selling a product, and it's not real estate.

One percent should be doable in lots of midwest markets, even in good neighborhoods.  It's not doable in any area of California.  Phoenix is averaging 0.6 percent per month.  I'm a seller, not a buyer at that percentage.  A 10 percent cap rate (free and clear) would imply a much higher percentage per month.

As Walt says, you have a one percent property.  Would be interesting to see the income and expense history for your ownership.  I think it would be helpful for those folks that are thinking about investing to see some real numbers.

If I'm doing something wrong, I'm happy to be shown/learn =]. Optimization and efficiency as the pinnacle of beauty and all that ^^ is my goal. I want the same thing the Genie wants :). I come from a family that has alot of friendly discourse, that sometimes people see as arguing, to win or w/e isn't my goal.

I mean, here's my duplex property(I use multiple calculators and hand done methods, this is just the fastest and generally solid one I've found).  I don't have exact numbers because we bought it before we got our FI stuff together. I can tell you the one time costs are accurate and the only numbers that are an estimation are the repair costs. It's a 40~ year old house, and after those 10k we've very much been on track the last few years(5-700 total maybe).

CC is probably one of my least read blogs, I was just using someone that posts in these forums and I assumed people would recognize, I'm not aware of any shady thoughts about him and his math seems to be the same (if a little simplified) as anyone elses.



http://www.calculator.net/rental-property-calculator.html?cprice=140000&cdownpayment=0&cinterest=3&cloanterm=15&cothercost=10000&ctax=1960&ctaxincrease=3&cinsurance=500&cinsuranceincrease=3&choa=0&choaincrease=3&cmaintenance=1400&cmaintenanceincrease=3&cother=200&cotherincrease=3&crent=1550&crentincrease=3&cvacancy=5&cmanagement=0&cknowsellprice=no&cappreciation=3&csellprice=200000&cholding=15&csellcost=8&printit=0&ctype=&x=72&y=17
« Last Edit: May 10, 2017, 09:12:28 PM by Lan Mandragoran »

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #51 on: May 10, 2017, 09:29:15 PM »
I think it's because selling can be hard to do, and it's expensive (depreciation recapture, capital gains, fees and commissions, vacancy while marketing the place, etc, etc). It's also easy to end up in a situation where the property *depreciates* and if you were depending on appreciation... that sucks. People who have only been doing RE for the last 10 years sometimes don't realize that.

It is absolutely true that principal paydown counts as money in your pocket in the long run. But cashflow every month means you can't run into really bad situations as easily, and it means you can mitigate the risk/illiquidity aspects of RE to an extent.

-W

Lan Mandragoran

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Re: Those who call the 1% rule garbage?
« Reply #52 on: May 10, 2017, 10:40:31 PM »
Yeah agreed. Buying or selling seems to be really expensive. Wasn't it warren Buffett that said his favorite holding time is forever tho :-P. (Although seems like indexing starts to win once the leverage is all gone)

Cash flow sure is juicy :o, it's also highly sought and tends to be tied to less pleasant places
To manage from the properties I look at. 

Semag

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Re: Those who call the 1% rule garbage?
« Reply #53 on: May 12, 2017, 06:13:55 PM »
Hey guys-

Lurking in this thread I love the discussion and it's really interesting.

I'm not really looking to get into landlording, purely because of a lot of the warnings I've read on this board (and horror stories) and I like the passiveness of the ETF's a lot. However, your discussion brought up a point (I belive Lan Mandragoran) touched on that I was mulling over a while ago.

The 1% rule (as any percentage rule) fails to take account of things that stay statically fixed as prices grow.

In other words, in a HCOL, you could be getting $3K or $4K of rent for property in a $700-900K Value.  This is at a .5% or .6% Rule.

*however* repairs typically would be based on structures, and not necessarily directly correlated to the large value of the *LAND*.  Does that follow?  In other words, if you only clear a 1% profit on $10,000, that's a lot more money than clearing a 1% profit on $100.

####

As an example - I've thought about my personal residence as a rental if I moved.  I currently have a 3.375% mortgage fixed for 30 years ($1900 payment).  I bought the house for $559,000, and the house is now worth much more than that.  The house is a 3/2, 1260 square feet in Central Coast California, and I am relatively positive the house would rent for $3,000 - $3,500 per month pretty easily and our town has a less than 1% vacancy rate.

The PITI currently is roughtly $2500 per month, so that would be a monthly profit of AT LEAST $500 or $700, or $6000 per year, *without counting the leveraged equaity as Lan* had stated.

The general rules on maintenance are figuring AT LEAST $5000 -$6000 per year for my house (1% right?) but I have maybe put that much into the house since I bought it in 2011. 

Am I way off base or missing something?  Just curious.

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #54 on: May 12, 2017, 09:39:26 PM »
Sure, you can have a super valuable property that cash flows. Say I have a million dollar house with no mortgage, and I rent it for $3k a month. Sweet, $36k a year before expenses - and if it's just an ordinary house in a place with high land values, my costs won't be insanely higher than the same house in a LCOL area (setting aside property taxes which are always a bit of a wild card).

The problem here isn't that I will *lose* money. It's that I have A MILLION BUCKS tied up making me (even assuming no overhead costs at all) 3.6%. It's one thing in a single location, and that means risk. It's expensive and time consuming to sell/illiquid. And the return is half that I'd get out of a boring index fund.

There are houses in my neighborhood (~$800k value, $3500/mo rent) that come very close to this scenario. I'd bet there is somewhere that it's a reality right now. That should scare the crap out of anyone looking to "invest" in high end real estate.

In general it's true that higher end properties can break the 1% rule and still cashflow. But they are also more expensive to get and they tie up a ton of your capital that could often be doing something more productive.

-W

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #55 on: May 13, 2017, 10:52:39 AM »
Sure, you can have a super valuable property that cash flows. Say I have a million dollar house with no mortgage, and I rent it for $3k a month. Sweet, $36k a year before expenses - and if it's just an ordinary house in a place with high land values, my costs won't be insanely higher than the same house in a LCOL area (setting aside property taxes which are always a bit of a wild card).

The problem here isn't that I will *lose* money. It's that I have A MILLION BUCKS tied up making me (even assuming no overhead costs at all) 3.6%. It's one thing in a single location, and that means risk. It's expensive and time consuming to sell/illiquid. And the return is half that I'd get out of a boring index fund.

There are houses in my neighborhood (~$800k value, $3500/mo rent) that come very close to this scenario. I'd bet there is somewhere that it's a reality right now. That should scare the crap out of anyone looking to "invest" in high end real estate.

In general it's true that higher end properties can break the 1% rule and still cashflow. But they are also more expensive to get and they tie up a ton of your capital that could often be doing something more productive.

-W

Is this why some are of the mindset that, especially as they get older w/ mortgages getting paid off on investment properties (less leverage) etc, it might not be a bad idea to sell the RE investments (assuming they're at a price point that is of appreciation rather than depreciation) and reinvest in the S&P500?

waltworks

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Re: Those who call the 1% rule garbage?
« Reply #56 on: May 13, 2017, 11:14:10 AM »
The "idea" is very simple: You want your money to work as hard as possible (accounting of course for liquidity, risk ,etc).

If your (extractable) equity in RE is producing less income than you'd expect in the S&P 500 (or whatever investment alternative you want to compare to) then most people would sell and reinvest elsewhere for the higher return.

-W

jeromedawg

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Re: Those who call the 1% rule garbage?
« Reply #57 on: May 13, 2017, 11:24:53 AM »
The "idea" is very simple: You want your money to work as hard as possible (accounting of course for liquidity, risk ,etc).

If your (extractable) equity in RE is producing less income than you'd expect in the S&P 500 (or whatever investment alternative you want to compare to) then most people would sell and reinvest elsewhere for the higher return.

-W


Makes sense. I was just mentioning that because I'm pretty sure I've seen several here (who currently invest in RE) discuss going that route as their general strategy. Invest heavily in RE when younger and leverage more. As you get older leverage less, sell properties, and reinvest that money in the S&P500. Seems like a pretty decent plan to me. In my case, I'm pretty late in the "invest heavily in RE" part so I'll just have to do what I can - it's just starting out that is tough, but I'll likely be in this 'research' phase for a while until the next deal comes along (as you pointed out, that probably won't be till the next 'crash' if it's local to my area/SoCal) 

Another Reader

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Re: Those who call the 1% rule garbage?
« Reply #58 on: May 13, 2017, 02:31:40 PM »
The key word is "extractable" equity.  If you have owned the property or properties for many years, the capital gains tax and the depreciation recapture can significantly reduce the equity you can extract.  You have to compare the income and anticipated appreciation from the current investment(s), including the end of depreciation at the 27.5 year mark, and the income and appreciation of the investment(s) you will purchase with the considerably reduced equity you extract.  I prefer the model Arebelspy and others have adopted, which is to develop substantial income from the real estate and then invest the difference between your net income and your expenses into paper assets or other investments.

Semag

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Re: Those who call the 1% rule garbage?
« Reply #59 on: May 15, 2017, 09:56:25 AM »
Thanks for the response guys, that makes a lot of sense.

To your point walt - a HCOL may have rentals that work, but you are tying up a SIGNIFICANT amount of capital.  While leveraged, the appreciation can be substantial (and multitudes of your initial leveraged amount) but relying purely on that would be speculation.