Will 1% Rule Be A Thing Of The Past?

Question

Hey guys!I live out in Bend, Oregon where it’s hard to find a single family home under $300k....even under $400k can really limit you!Same thing with the cities like Salem, Eugene and Portland. Oregon is expensive!!My question here is what happens when housing prices officially rise to the point that you can no longer find the 1% rule anywhere? A house will rent for $2,000-$2,500 pretty easy but what if none of the houses in town meet the 1% rule anymore? What happens when the whole state finally exceeds it?I do get that you can still flip these properties and use them in one way or another. But as long as home values keep rising and wages stay the same it’s only a matter of time before rents can’t support the home mortgage of the investor anymore. Wondering what y’all experienced folks have to chime in with!

Forrest Faulconer · Answer

@Brendan LawrenceHey Brendan, I was born and raised in Southern Oregon, lived in Bend for a few years. The prices out there are appalling, but understandable as Bend is an awesome place to live, but still quite small (I remember when it was just a tiny mountain town). I now live in Okla. City, work as a realtor and come across many properties that fit the 1% rule. If it was up to me, I would live somewhere beautiful like Bend, invest in the Midwest, use my passive income to purchase Bachelor passes, Boneyard beer and food at Spork, I would be happy forever. :)Forrest Faulconer

Filipe Pereira · Answer

@Brendan LawrenceA couple thoughts: 1. Switch asset class ( go to MFR)2. Switch markets (CT for example still regularly exceeds the 1% rule on MLS properties)3. Nothing really happens when the entire state can't meet the 1% rule. It's too vague. Investors will either buy based on hope for appreciation, or they will invest their dollars elsewhere. There are LOTS of places that don't hit 1%. Think of the big cities (Boston, NYC, etc.).. they dream of 1% deals.

Account Closed · Answer

@Brendan Lawrence"My question here is what happens when housing prices officially rise to the point that you can no longer find the 1% rule anywhere?"You sell if you own. As the general 1% indicates, you don't buy. There are other ways to invest in real-estate without maxing out your personal liability. One could also ask what happened to the 2% rule... That used to be the mantra on the forum 5-years ago. Then it was the 1% rule, then house hack, and now we have hit the peak mania via remote flips. "A house will rent for $2,000-$2,500 pretty easy but what if none of the houses in town meet the 1% rule anymore? What happens when the whole state finally exceeds it?"Well, that just means a lower Return on Investment. At that rent rate and sale prices, what is your theoretical net each month? Assuming you have cash-flow goals in mind, simply put more down. Instead of putting large down on a high-priced rental hoping it continues to be more unaffordable, I realized I could loan the funds for a year or less, create more cash-flow than with my capital leveraged, and have the legal right to foreclose on the property if terms are violated. I'm talking about SFR in the Portland Metro area. Oh, and you don't have to manage a contractor crew, property manager, or tenants. The sacrifice? Fixed return. Do you want to be the one buying on the MLS at the peak? I assume you are not referencing off-market deals which can work no matter the cycle.

Cory Carlson · Answer

In Oregon, (especially C.O) the fix and flip and single family buy/hold market is the rat race of real estate investing. The 1% rule IS dead in the NW. Even small-plex's are dangerously close to break-even numbers. Depending on your available capital, I've been advising my clients who don't have enough of their own capital to pool funds and acquire larger (also higher returning) property types than single family.I am working with several single family portfolio's at the moment all over the state and the strategy is exchange out of several at the same time and acquiring apartment buildings. From a return on capital/equity its a no-brainer after comparing the current returns. 1. Improved cashflow2. Better tax benefits3. Owning higher asset value4. Capital/equity growth using the income approach. For example, a $2,000,000 apartment building at a 5 CAP, has an NOI of $100,000. Raising that NOI year 1 just $5,000 (this is raising rents $27/unit on average for a 15 unit building) increases the value by $100,000 (at a 5 CAP). This thinking (my #4 point) is a bit convoluted in the 2-4 unit market, but the same principle applies which is why if my client doesn't have the means to acquire an apartment building and wishes not to pool their funds to go with multifamily. You can better manipulate values using the income approach.