The Money Mustache Community

Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: kindviking on December 22, 2015, 11:29:40 AM

Title: Using "rules" as GUIDES and not RULES
Post by: kindviking on December 22, 2015, 11:29:40 AM
Not to set off a firestorm, but I wanted to go out on a limb and make an observation: the 1% rule, 2% rule, etc., are good for a quick sense of opportunity, but you should not make a purchase decision solely on this. I've seen on more than a few occasions (here and biggerpockets), where people asking for advice will get slammed for only being at 1% or 1.3% or something. A few years ago, when I was looking for advice, I was given similar feedback, i.e., "you shouldn't look at multi-family properties less than 2%." I followed that advice for a few months, reviewed dozens (hundreds?) of properties, and found it to not be good advice :)

What really matters are the actual costs and the actual rents. The other key data points are 1.) the potential rents vs. how quickly you can get those rents and 2.) the looming future expenses and how quickly you'll have to pay them. I've seen properties that meet the 2% rule in one market but have an actual ROI less than a 1% property in another market, entirely because of taxes, insurance and owner-paid expenses like utilities. Throw in untapped opportunities like converting a low-rent "special" unit into a nice AirBnB or re-establishing a mobile home on an empty pad, and you can easily turn a 1% property into a 3%+ property.

The only way to make an accurate decision, in my opinion, is to gather all the facts (ALL ... don't be lazy!), and compare that ROI to other opportunities (in the same market and in other markets). At the end of the day, the only thing that matters is your real ROI. If this sounds like a lot of work, that's because it is! At least up front, but then you can feast on your 20% or 30% ROI afterward.

I hope others out there find this useful. It's the advice I wish I had a few years ago!
Title: Re: Using "rules" as GUIDES and not RULES
Post by: cjottawa on December 22, 2015, 11:44:47 AM
"Rules are for the guidance of the wise and the obedience of fools." (unknown)

Understanding why the rule exists is as important as the rule itself so you know when the rule no longer applies.
Title: Re: Using "rules" as GUIDES and not RULES
Post by: kindviking on December 22, 2015, 11:58:38 AM
"Rules are for the guidance of the wise and the obedience of fools." (unknown)

That is a great quote. Exactly what I was trying to say with far fewer words!
Title: Re: Using "rules" as GUIDES and not RULES
Post by: arebelspy on December 25, 2015, 07:14:01 AM
There aren't any rules that I'm aware of.

There's "rules of thumb" which are for quick off the cuff estimates, but not for any serious analysis.