1% Rule vs. Potential Growth

7 Replies

1% Rule seem hard to achieve (at least harder to find) in "hot" growth RE markets (i.e. Austin, Seattle, etc.) but easier in some RE markets (i.e. Ohio, Missouri). Would you rather do a buy & hold (holding period of at least 10-15 years) rental investment in a "boring" low growth market but achieve 1% rule or invest in a "hot" growth RE market, aim for appreciation but only achieve a 0.65-0.70% rent/purchase ratio? Thoughts? My risk tolerance is high but I also want to be smart about it. 

Reason I ask is I am currently deciding between buying a rental in Dayton, Ohio (achieve 1% rent/ratio but zero to little appreciation) or buying a rental in Austin (0.70% rent/ratio but better growth prospect). What other factors should I consider?  Thanks! 

I would never buy speculation. While I do think that Austin will continue to grow rapidly for the next few decades I think there are just too many unknowns to account for. If the tech industry experiences any rocky road that growth could slow down quite a bit.

Originally posted by @Ty Man :

1% Rule seem hard to achieve (at least harder to find) in "hot" growth RE markets (i.e. Austin, Seattle, etc.) but easier in some RE markets (i.e. Ohio, Missouri). Would you rather do a buy & hold (holding period of at least 10-15 years) rental investment in a "boring" low growth market but achieve 1% rule or invest in a "hot" growth RE market, aim for appreciation but only achieve a 0.65-0.70% rent/purchase ratio? Thoughts? My risk tolerance is high but I also want to be smart about it. 

Reason I ask is I am currently deciding between buying a rental in Dayton, Ohio (achieve 1% rent/ratio but zero to little appreciation) or buying a rental in Austin (0.70% rent/ratio but better growth prospect). What other factors should I consider?  Thanks! 

I assume you are talking sfr. Austin vs Dayton...if they were classic cars that might be Porsche vs Pinto on average. Let's imagine these two cars were rentals and eventually both could be paid off rentals.   

The Porsche increases in value and rents every year and eventually the rental cash flow is a high ratio to purchase price. 

The Pinto has little to no future collectible value so value and rents are not growing at near the pace of the Porsche. True the Pinto was intially higher but after a few years the Porsche was overtaking the Pinto in rental cash flow because it is appreciating.  

At the end of the day ask yourself which car ( location) would you rather own outright?  Which car (location) is going to be easier to sell or rent for more mula? Which car (location) is capable of producing more profits with less work? Which car (location) will have better renters? Which car ( location) would you rather own in 15 years? Which car ( location ) do your future kids hope you picked? 

But wait, one could buy 4 Pintos vs the one Porsche...then maybe check to see if you really want 4 Pintos in 15 years. 

Good luck!

I hate to be "that guy" but this question has been asked a million times. It's about your goals. Not anyone else's. Simple as that. And a "smart" decision also then depends on what your goals are. You can be anywhere on the cash flow/appreciation spectrum. If your risk is high then go big and go for appreciation, but don't be shocked if a downturn comes and you're underwater. If you want more peace of mind then there is no shortage of 1%+ markets out there!

Dayton is more like a Honda Civic and less like a Pinto.  No matter what the cycle does it going to keep producing income. No you won't get much or any appreciation but you will get good cash flow for a long time.

Originally posted by @Paul Amegatcher :

Dayton is more like a Honda Civic and less like a Pinto.  No matter what the cycle does it going to keep producing income. No you won't get much or any appreciation but you will get good cash flow for a long time.

Right on. There must be some Civics there too. Keep in mind the Civics usually can sell quick and easy...the Pintos not so much.

@Jordan Moorhead - Thanks for the input. Much appreciated. 

@Matt R. - Great perspective. Yes, SFRs in Austin vs. Dayton. The SFR I intend to buy in Austin is new construction so my CapEx and repair costs should be minimal in the next 10-15 years. The properties I'm considering in Dayton, OH (Beavercreek, Centerville, Oakwood, Fairborn) are a bit older so there might be some more repair & maintenance costs. But much like @Paul Amegatcher 's comments, it'll consistently rent close to 1% no matter what the cycle does. 

@Ryan Evans - Thanks for the feedback. 

Originally posted by @Ty Man :

@Jordan Moorhead - Thanks for the input. Much appreciated. 

@Matt R. - Great perspective. Yes, SFRs in Austin vs. Dayton. The SFR I intend to buy in Austin is new construction so my CapEx and repair costs should be minimal in the next 10-15 years. The properties I'm considering in Dayton, OH (Beavercreek, Centerville, Oakwood, Fairborn) are a bit older so there might be some more repair & maintenance costs. But much like @Paul Amegatcher 's comments, it'll consistently rent close to 1% no matter what the cycle does. 

@Ryan Evans - Thanks for the feedback. 

 Cool. The initial % or static % may be less important than the percentage of cash flow growth overtime. For example around here sub 1% initial cash flow is common. 10 -15 years later that could grow to 2%+ or even more. If much longer time frames are given it might be 4%+. If one is always at a static 1% , inflation eventually erodes cash flow too. It is not a right or wrong deal rather just the differences between identical sfrs in totally different locations or the diff with classic Porshces and Civic/Pinto rentals. 

This difference could be partially represented in the original buy cost. That is one location has more perceived value in the first place. There would be underlining fundamentals to support that too like jobs, growth, schools, weather, supply, demand etc...

Good luck! 

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