Disregarding the 1% rule?

[Tyler D.]

I'm looking at property in the state of Oregon, which has had amazing appreciation but poor (starting) cashflow. Basically the only properties I have found that break 1% are in rural areas, or dumps, or both.

I'm looking specifically at fourplexes to owner-occupy, and at best I've found something that hit 0.8% so far, but most hover between 0.6-0.7%. I'm wondering if it would be a poor investment to disregard the 1% rule in this case? I'd like to start accumulating properties in my area (by owner occupying, then moving out a year later), but only if it makes sense financially.

Basically, I want to know if:

1) Is it sound strategy to ignore the 1% rule in areas with high appreciation, and

2) Is it alright to ignore the 1% rule for fourplexes? (1 roof, lower costs, etc).

[Nick Rutkowski]

@Tyler D'Alessandro

Well yes and no. If you’re shooting for an equity play then you can ignore the 1% rule but I wouldn’t be buying negative cash flowing properties hoping they appreciate higher than your loss. That’s a recipe for disaster. If you’re shooting for cash flow, then try to get 1% if not higher.

[Satyam Mistry]

@Joseph Cacciapaglia Hello Joseph, wanted to follow up on your post on this topic. When you mention that the higher returns in these types of properties are usually after year 3 is this due to value add and stabilization of the property that has occurred within these first few years? I am assuming these assets are already in good B class neighborhoods. Also, is there a particular year built range that yourself and your clients generally stay around? Thanks for your input. 

[Joseph Cacciapaglia]

Originally posted by @Satyam Mistry:

@Joseph Cacciapaglia Hello Joseph, wanted to follow up on your post on this topic. When you mention that the higher returns in these types of properties are usually after year 3 is this due to value add and stabilization of the property that has occurred within these first few years? I am assuming these assets are already in good B class neighborhoods. Also, is there a particular year built range that yourself and your clients generally stay around? Thanks for your input. 

 The higher cash flow in the future comes primarily from rent growth. The areas with the lower rent to price ratios tend to have stronger rent growth and appreciation. So you need to hold those assets a little longer to get strong cash flow. I've often done better with properties that have very little cash flow day 1, but were in great areas, than I've done with properties that were 1%+, but in less desirable areas. That's because it doesn't take many years of strong rent growth to overcome the initial deficit, and then in each future year you continue to outperform.

This strategy often appeals to investors with very long investment horizons. Therefore, they're often buying properties build in the last 10-20 years. There are certainly exceptions though.