1% Rule in Practice Regionally

[Patrick Menefee]

Hello BP

I’m curious how members in different regions have tailored the 1% rule (especially charlotte, but anywhere really). Looking relative to some of the properties I’ve seen in the area, 1% seems difficult to attain and 2% seems nearly unfathomable.

I know this isn’t a hard and fast rule, and i know it varies by market. But how many of you abide by it or what variation works in your area?

Thanks!

[Bart H.]

Originally posted by @Scott D Burrows:

@Patrick Menefee  

Another point to mention, make sure to include at least the following, when determining the total return: 

• Principal paydown (use an amortization table.. you can find a million on Google) or forced equity/appreciation of investment.
• Rent Cash Flow (CF) after payments/taxes/insurance.
• Tax Shield (if you are a higher income earner, this can also be something as well). 
•  Finally, I usually will consider about a .5% appreciation rate per year for overall appreciation (non-cash benefit, but can come in handy down the road), increases net worth slowly without taxes.

Hope this helps as well. 

Sincerely, 

Scott

I think there are a few other things as well.  

You do have the leverage on Real Estate that you can use that isn't typically available to the owners of stocks.

Also, depending on how you have your portfolio structured in terms of financing, real estate should be a pretty good hedge against a inflation.

I know we haven't had real inflation in a generation or more.  and initially valuations will go down if interest rates go up, but if you start seeing 5 or 6, or even 7% annual inflation, its a real possibility that interest rates on bonds go way up, and stocks go way down in value.  

All while inflation significantly raises rents.  I'd love for our rentals to go up 5-6% while our payments stay fixed.

[Ron Fletcher]

@Jordan Moorhead

Probably because you’re competing against the Reno to Rent guys. Haha

[Tiffany Perry]

@Patrick Menefee

Thank you for your post. Your question generated a lot of good information.

[Patrick Menefee]

Big thanks to everyone, this certainly got much more attention than I expected and the feedback has been phenomenal. I've certainly found that I can do better analysis on my end, and to that point I want to especially thank @Michael Clay for reaching out and hopping on a call today with a specific example in the Charlotte area. I appreciate you taking the time.

Some of the most interesting points I gathered from this are:

• find what metrics are most important to you, and evaluate appreciation vs. cash flow
• frame of reference only-1% doesn't make it a good deal, .95% doesn't make it a bad deal. Obviously it depends on the region, but also evaluate the neighborhood, quality, future capex, etc.
• the comparison to stock PE ratios by @Bart H. was a very interesting point (on page 2 if you haven't seen it, I recommend taking a look)
• ultimately, identify your strategy and see how the 1% (or any other) rule applies

The bottom line for me is I need to spend more time analyzing deals to figure out what's right for what I'm trying to do. Thanks all for the input, and I look forward to seeing more.

[Dan K.]

Don't forget, you can force appreciation through renovation, additions, etc. When evaluating properties, if there is a value-add possibility you can change aa .5% property into a 1+% property.

[Michael Clay]

@Patrick Menefee Thanks for the shout-out. I look forward to doing some business together in the future!