Buy and Hold and the 1% rule?
Colorado Springs, CO · Member since 2017 · 32 posts · 17 votes
I'm just curious about buying and holding properties while renting them out. In most everywhere in the US, you cannot rent a property for at least 1% of the value. In Denver, you can buy a $400k property and get no where near $4k/month in rent. In Colorado Springs, you can get a $200k property and rent it for $1k/month.
I find it like this most in the country until you get into lower income areas in Missouri and Florida. Is anyone in Colorado using the buy and hold strategy to build wealth?
@Ryan Jones Its possible, you just have to find the deals. I have properties in Greeley, Fort Morgan, and even Denver that all meet the 1% rule and some 2%. Be patient and buy the ones that make sense. Flip the rest and build cash for down payments.
I've purchased two properties; One 3/1 cape cod renting for $750 (Paid 21,500 and put 11,000 into it), the second is a 2/1 and rents for $525 (Paid 17,500 and put 2,500 into it). These were both cash deals and the only ones I've completed. My properties are in a C- area, so there's a bit more of a headache when it comes to managing them, but they cash flow nicely!
I agree- it is definitely hard to find properties that cash flow in Colorado Springs. We have had moderate success at finding decently-cash flowing SFHs in CO Springs. Our numbers are as follows:
For a cost basis (meaning what I bought the house for and the capitalized improvements- this doesn't consider it's appraised value) of $140,000, $140,000, and $155,000; we are renting them out for $1200/mo each. So this is .86%, .86%, and .77%- so it does not quite meet the 1% rule, but we are very pleased with these properties, as they have great tenants, the properties look great, and are in growing areas.
It's tough with low unit count properties to meet the 1% rule. Gary Keller recommends at least 0.7% in his book "The Millionaire Real Estate Investor". The condition of the property is a big part of whether you can shave that percentage down or not. If you are anticipant above average maintenance costs, I'd be very careful with purchasing properties below 0.7% rent/price ratios.
@Ryan Jones - We are taught in order to reach goals we have to make them achievable. Where ideal, like nirvana the 1% rent ratio proves itself to be a bit lofty in strong seller markets. This said, I regularly see much better than the .5% you mentioned.
All the best!
@Ryan Jones Its possible, you just have to find the deals. I have properties in Greeley, Fort Morgan, and even Denver that all meet the 1% rule and some 2%. Be patient and buy the ones that make sense. Flip the rest and build cash for down payments.
I'm just curious about buying and holding properties while renting them out. In most everywhere in the US, you cannot rent a property for at least 1% of the value. In Denver, you can buy a $400k property and get no where near $4k/month in rent. In Colorado Springs, you can get a $200k property and rent it for $1k/month.
I find it like this most in the country until you get into lower income areas in Missouri and Florida. Is anyone in Colorado using the buy and hold strategy to build wealth?
I know people buying 1% deals off the MLS in Denver. They are condos in complexes that have high numbers of non-owner occupied units but they meet the rule. The other 1% deals involve rehabing aka the BRRRR strategy.
Another thought, buying a $400K property and renting it out is not the sweet price point for SFR rentals. You need to be below $300k and close to the $200K price point to even begin to consider making it a rental that would meet the 1% rule.
You can't buy a pretty house and then turn around and rent it out at the 1% rule here in Denver. You have to do some sort of value add or find some niche that is off the beaten path.
Now if you lower your sites to 0.5% then I think there are probably multiple opportunities on the MLS that have a reasonable shot at qualifying. Again as close to $200k as you can get. Really even a pretty basic 2 bd SFR will rent for $1,500 which allows you to shop up to $300k. The market is tight with very low inventory so it's hard to actually win the sub $300k properties but all it takes is money. BTW don't think I am endorsing doing a 0.5% deal. I'm just saying they can be had.
The opportunities are found when you start shopping outside of the MLS where you have very stiff competition.
1% rule is definitely possible. I'm in St. Louis and our first property was a 4-family purchased last fall for $182,000 all in cost (purchase price + closing costs). Rents are $550x4 plus $50 for the garage. 2250/182000 = 1.2%
We found it on the MLS, but it took several months of looking and running the numbers on dozens of properties. Being a 4-unit helps immensely. I can't remember the last time I ran the math on a duplex in my area that met the 1% rule except in C- or D areas. I can't imagine trying to make the numbers work in a hot market like Denver. That said, within a 90-minute drive of most parts of the country I imagine there are areas where you can find 1% deals or better more easily. or you just might have to hunt for off-market deals instead of relying on the MLS.
Even here if you go outside St. Louis 15 minutes there are a ton of semi-rural areas where you can find 1-2% deals all day, but you just have to learn what works in that market and it's probably very different from what I'm looking for in the city.
"All real estate is local" is pretty much the best mantra you can live by regarding this stuff.
I would agree with a lot of what has been said here already. My two cents is you really need to be careful of all the "rules" you hear about. In reality, there are no tried and true rules that can cover every market in every state. You really need to evaluate the area you want to invest in and see what makes for a good investment. I personally have cash flow on property that I think was a great investment, none of which meets the "1%" rule, and the investors I work with as an agent perspective are also not receiving "1%" rule properties, but we all agree they are good investments nonetheless that are still kicking off monthly cash flow.
To keep it in perspective, you cannot have the same rule for two wildly different markets, even on a city-to-city basis within the same state. Take Colorado Springs and Pueblo for example. They are only 45 minutes apart yet the median sale prices are very different. In Pueblo you may be looking for a 1-2% rule property and Springs may be about a 0.65-0.75% rule. Both can be great investments and one may not be better over the other.
Working with a lot of local Colorado Springs and Denver investors, I have found the new guys can get a little stuck in the rules and the numbers. You need to keep in mind there are more variables at play when you evaluate a market, a neighborhood, and a specific property. Examples include median sale prices, job stability for an area, which neighborhoods may be seen as up-and-coming, are they A-B-C neighborhoods, when was the roof and furnace last replaced, what type of electrical panel exists in the home, etc. This is where working with an expert can really make or break your investing career.
Hey @Ryan Jones it sounds discouraging, but it can be done. Remember, those are just rules of thumb. Like @Bill S. said, you need to find a niche and hammer it. Right now, everyone and their dog in Colorado thinks they can make money in real estate investing (and they probably are) so you need to set yourself apart. Colorado Springs, and even Pueblo, still have deals. Good luck!
Thank you everyone for your replies! I have $200k down on my current home (I should've used less to have more money to invest...I know.). But meanwhile I have another $50k to get started. But I'm researching and learning for awhile. :)
I'm just curious about buying and holding properties while renting them out. In most everywhere in the US, you cannot rent a property for at least 1% of the value. In Denver, you can buy a $400k property and get no where near $4k/month in rent. In Colorado Springs, you can get a $200k property and rent it for $1k/month.
I find it like this most in the country until you get into lower income areas in Missouri and Florida. Is anyone in Colorado using the buy and hold strategy to build wealth?
Yes...and I fall under the 2% rule quite well. Though I'm not doing this in Denver or Colorado Springs, but here in Colorado, I'm doing it in Fort Morgan. I'm also doing this in Indiana and I've seen a TON of properties in the midwest (from Kansas to Ohio) that all qualify under the 2% rule.
Overpriced markets like Denver - they are EXTREMELY difficult to find. It's very possible in Colorado Springs, Fountain, Pueblo, and even if you follow I-25 down into Raton, Albuquerque, Santa Fe, etc.
Yes, nearly everything we do with B/H in Indy is 2%.
If you can not achieve the minimum 1% rule when buying then the property will never achieve that level due to inflation/appreciation. Real estate investing is not worth the time or effort for miniscule returns.
Based on other investment vehicles there are easier investments if you can not achieve that minimum goal. Buying Real Estate simply to say you are investing in Real Estate is not investing.
Investing in sub 1% properties is like buying a 3 legged race horse. Yes you can tell all your friends you own a race horse.
The trade-off I haven't seen discussed in this thread is the questionable upside potential of markets such as Pueblo, Indianapolis and similar ones where the 1% rent ratio is easily surpassed.
Of course, you bought a cash flowing property I mean, what is the point in buy and hold real estate otherwise but, what is that respective market's long term play? How is their economy? What is their population growth (or decline)? What's the infrastructure like and is it being developed?
WHY is the market rent so low?!
These factors and others will affect real estate appreciation which, whether we like (counting on) it or not, is the 800 lb gorilla where building long term wealth is concerned.
@Norberto Villanueva The market rent is Actually moving WAY up. I used to be able to rent a 2br, 2 story house in Pueblo for $550/month. This was in 2011. Now you can barely get a studio apt for the same amount. Minimum wage is going to hit $12/hr, so the rents keep moving up every year. Springs is in the bidding war stage, and Pueblo is only 30 minutes south of them. I'm sure you see how high rents have gone in Springs since you are from that area.
Here is an article from Forbes mag...
https://www.forbes.com/places/co/pueblo/
Here is an Article from BP showing Pueblo as the #15 market in the U.S.
All of my properties in Indy have been above 1.7. My latest B&H last year was over 2. It is possible in the Indy market to find properties in better neighborhoods above 2.
I'm just curious about buying and holding properties while renting them out. In most everywhere in the US, you cannot rent a property for at least 1% of the value. In Denver, you can buy a $400k property and get no where near $4k/month in rent. In Colorado Springs, you can get a $200k property and rent it for $1k/month.
I find it like this most in the country until you get into lower income areas in Missouri and Florida. Is anyone in Colorado using the buy and hold strategy to build wealth?
I didn't read the other posts, but the 1% rule of thumb exists in 'reasonable quantity' for those who look (a little harder to see/find now compared to 5 years ago) in most of NC except the metro areas of Raleigh, Charlotte, Wilmington, and anomalies like Ashville and other lower population/high demand islands like coastal cities. Acreage wise, 80% of NC is in 1% rule of thumb potential. True of SC too. The problem is that it is very difficult to operate larger scale in these rural areas. Limited PM, limited tenants, limited everything... which is why a lot of local people rent one or a few mobile homes (low entry $, lower margin) and manage them w/o a PM. Makes sense for the locals.
It's out there, but very difficult to find. First time buyers pump up prices and eat into returns.
My investor clientele (which made up the vast majority of my business at one point) is slowly becoming regular owner occupant...
The property I bought in 2015 will be at the 1% rule in a few years. And I am ok with that, again due to my financial goals and personal plan.
I mean no offence Michael, I absolutely agree with the first half of your post. However, I want to warn any new investors who might read his post. Be careful with the thinking above!!!
I believe the intention of any of the 'rules' is based on actual/attainable numbers AT TIME OF PURCHASE. Basically what you are saying Michael, is that you maybe bought your property at a .5% rent to purchase, but with rent appreciation in 2 years since...and a couple? years more, you will hit 1%. IMHO that's not investing. At best its a semi-educated guess, at worst its gambling.
As you say, returns in hot markets are lower, because many investors are taking this same line, and accepting lower cash on cash returns with the expectation of appreciation. Yes this is how you grow wealth, but it is for the experienced investor, and one that is not over leveraged and so can withstand a hit to the market (what if stocks crash next year, or current tax policy goes through reducing incentive for owner occupants). For those with a smaller portfolio, I would recommend sacrificing some capital gains, for a little more cash flow.
As other posters have said, sometimes the long term numbers don't work. I have ended up doing a bunch of flips because we have found deals with plenty of equity, but having flipped, we might be able to sell for 150K an only rent for 800. I often put this down to a lot of end users getting back into the market.
It will always depend on where you are investing, what your goals are, how much time you have, and the current state of your portfolio. There are houses that I sold 3 years ago, which if I was in my current position I would have held onto...but at the time needed to turn and burn to build up capital, as we didn't have the track record or portfolio to borrow any more money from banks and had tapped the private money we had sourced to that point.
As was mentioned on a relatively recent BP podcast, the 2% rule is no longer (with the exceptions of war zones...And so when you allow for capital expenditures and vacancy, you will probably NET the same return and a solid 1% built since 2000).
Finally @Ryan Jones, while 1% deals are definitely still out there, they are getting significantly harder to find. Because they are harder to find though, I believe it is even more important to work hard to find that great deal. As other posters have mentioned, .75 might be more realistic in the front range for anything outside a war zone. Unless wage rates increase significantly soon, I think we are closing in on the top of the market. With all that equity in your home, if you want to get in, you are probably best to pull a heloc, so you can offer cash. Whatever you do, just don't be tempted to use it for a new car or boat! Save it for that screaming deal so you can make your offer the most competitive.