Does this sound crazy to you?
I keep hearing about the 1% rule in this thread, but recently signed a 6 month lease on an apartment for $2k/month, all utilities, wifi, sewer, included.
I looked up similar units and they are selling for $500,000.
So according to this 1% rule I should be paying $5,000/month, not $2,000 month.
How are people even breaking even on some of these real estate "investments"? I just can't wrap my head around why anybody would every buy in a real estate market so over inflated when you can rent so cheaply?
It is all about price appreciation and while people (including myself) have been predicting the end of the crazy price appreciation in California for my entire life and it hasn't happened yet.
I've been keeping an eye in CA prices and rents since I was a teenager, so nearly 40 years and in neither in greater LA area nor in the SF Bay Area were rentals ever close to the 1% rule, except in few isolated areas.
And yet it is been a fabulous investment. I bought a house in Santa Clara CA in 1984 for $153,000, with a college roommate, 15 years later I sold it for $444,000 to another single Silicon Valley engineer, who's kept it ever since. Today 20 years later Zillow says it's worth $1,740,000 and it can't be far off because the identical floor plan one block away sold for $1,625,000 9 months ago, and a very similar house sold for $1,750,000 3 months ago. That's an 11x appreciation. Which is 7.25% per year over 34 years.
If I kept the house, there be no mortgage. I'd be collecting rents of 4,500/month my property taxes would be about $250/month and maybe another $150 for insurance, even with generous allowances for repairs, property manager etc. I'd be netting $3K+ a month Now $36K profit on an asset worth $1.7 million seems very low. However, the $400K price appreciation in the last two years is what really important.
If I had elected to rent rather than live in the house it would have cash flow negative for at least 5-6 years and the same thing is true for the guy who bought it from me. But what has been made CA and other hot markets such a fabulous investment is leverage. I only put 10 down, $15,300. 34 years later that $15,300 would have increased by a least 100 fold to $1,550,000 in profit That's 14+% annualized rate of return, not even counting the almost 30 years of positive cash flow.