Updated over 1 year ago on . Most recent reply
- Property Manager
- Clarksville, TN
- 210
- Votes |
- 443
- Posts
Downside of the 1% rule...
Here's why I don't like the 1% rule...
A buy-and-hold investor should think long-term.
The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)
The 1% rule stops a lot of folks from getting started.
Think big picture.
Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!
- John Williams
- [email protected]
- 931-272-3065
Most Popular Reply
#2 Starting Out Contributor
- Realtor
- Hanover Twp, PA
@John Williams, a few comments:
1. IMO the 1% is just rule of thumb for filtering potential deals. If you are looking for cash-flow, you can apply the 1% rule and scan through many deals and then only focus on ones that have potential cash-flow. That's about all its good for.
2. Cash-flow is KING! Yes, appreciation has the potential help you hit the jackpot and make you more wealth. However, cash-flow is better for a number of reasons. Perhaps the most important of which is that its more predictable and more CONTROLLABLE. Except for forced appreciation, you have no control over appreciation after you buy a property whereas you can make decisions along the way to improve your cash-flow. Raise rents, reduce expenses (shop insurance, appeal taxes, refinance, etc).
3. You mention tax benefits. That is where cash-flow shines as you have an income to use those tax benefits with.
4. Appreciation is EXPENSIVE! Yes, it costs you money!!! Its locked up in the equity of the property and it will cost you money to touch it. If you sell, you pay closing costs, commissions, taxes (including depreciation recapture), etc. Even if you refinance, you have origination costs, appraisals, etc.
So, while cash-flow is tax advantaged aka CHEAP; appreciation is EXPENSIVE!
5. Most beginning investors need to and should invest for cash-flow. Most small time investors can't afford the risk to buy and hold a property that doesn't make money in HOPES that it appreciates enough. In additional new investors are more likely to understand cash-flow than how to predict appreciation.