Kind of wondering generally how a SFH rental investment will work if the 1% rule cannot be met. I know it's not a concrete yes/no rule, but I don't see how the numbers work in your favor after that.
Homes in my area are at 220-260k for a cute, basic 2 bedroom. It may also need 10-20k in rehab. That plus 20% down plus closing costs, it adds up rents may be $1200, which barely breaks on just the loan.
Possible solutions just move farther out of my metro area?
You don’t need 1% but numbers you’re using are waaay under 1/2 of 1%.
Imagine Vegas where it’s $250k move in ready for $1400/mo. Not a whole lot better and still under 0.6% but you’re making money.
Then imagine a different area where it’s $200k for $1500/mo move in ready. You’re still only at 0.75% but you’re doing fine. Same thing happens on the high end.
I have a $460k lake home that only rents for $2700/mo (0.6%) it makes about $10k/year even though it doesn’t cashflow. (All the income is in principle pay down). It also appreciated $100k over the last couple years, but that’s MN lakefront for you, nothing new there.
I wouldn’t suggest all your houses were under 0.75% but 1% certainly isn’t needed. That “rule” doesn’t mean anything since it doesn’t consider property taxes, property age, insurance, weather related expenses, exterior maintenance, landscaping, etc, which vary widely based on property location.
(Imagine a $200k property in Alaska, the east coast, Vegas and Texas. Areas with extreme weather, high property taxes, old properties, income taxes, etc.)
@Christopher Davis It's all about cashflow. If you break even in cashflow with your reserves covered, which means you have positive cashflow but have to set it all aside for reserves, then it may work, because you are getting appreciation on the property, amortization on your loan, plus rents will increase in the future. But, why invest money in a property that is only break even on cash flow initially (no money down with owner financing would be okay)? I would recommend that you look in other markets within driving distance of Nashville, where you can find better deals.
Yield is a function of risk. Higher risk properties/markets will have higher yields. Lower risk properties/markets will have lower yields. Nothing works or doesnt work in any type of investment. It is all a matter of risk and probability. Most of my properties, upon initial purchase have ratios in the 0.5% to 0.66% range.
@Christopher Davis The reality is these are sellers markets right now, period. There's a lot of feel good bull **** on these forums, but the reality is this is a matter of numbers, and if properties don't add up, then you don't get yield or you have to go all cash for a garbage 3-4%. Appreciation is what brokers use to sucker buyers in priced out markets. Might work, but you are a speculator, not an investor if all you are looking at is appreciation.
1% rule is a good bar, depending on expenses (local property tax especially).
If someone disagrees, ask them how the less than 1% property is going to cash flow for you, and lets see if they can show you in a reasonable fashion.
The shoe won't always be on the seller foot, and your skepticism serves you well in this market.
@Bill Brandt 460k at 2.7k/mo rent means you are most likely 80% or better equity. Anything less and you won't have enough debt ration for a conventional loan. So forget about BRRRRing or some of the other equity strategies touted on these boards.
You may be close to 10k NOI but you're cashflow is nothing to speak of for the horizon of the investment, assuming you plan to hold for 5-7 years. You're whole investment is hinged on appreciation.
For opportunity costs, I'm looking at 5-8% on bond funds- yield, not even mention gain,(bought at the right time) and trying to figure out why on earth I would cash them to buy into an investment like the one you have described.
The OP, like myself, want to see meaningful cash flow for the hassle and bull **** involved in being a landlord that justifies it.
@Christopher Davis remember the 1% rule is really a guideline and needs to be adapted for your area and your management.
If you’re in a high property tax area, costs will be higher. If you do a full reno before renting, your repair costs will be lower.
I know that at 0.8%, I’ll be pretty happy. But I still do a full budget calculation before buying any house.
I recently had a seller come to me with two duplexes. They seemed to be a good deal, not require much work, etc. but did the math and realized that 2 duplexes meant two insurance payments, 2 sets of taxes, etc... didn’t make the financial cut. Would have been a bad mistake if I just relied on my guidelines.
@Christopher Davis you can 35-60 mins from Nashville and get to you numbers closer to that 1% target. Clarksville, Shelbyville, Columbia, Springfield all have opportunities like that. I find them for investors often.
Let me know if you'd like to discuss further.
All depends how you look at your RE investments. IMO....cashflow is whatever. It’s nice and all but 200/door isn’t life changing money and if you have 10, 15, 20 doors.... that’s just another job and added stress. However, I look at my stuff similar to a 401k. I’m gonna put a down payment on it. I might put some money into it at first and I might even spend some of my own funds along the way to keep it up and running. Talk to me in 20+ years though when my tenants have paid the mortgage, the property has appreciated (hopefully), I’ve used it to buy other properties and it’s throwing off 2.5-3k/mo on rent.... this is a long game.
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