All Forum Posts by: John Williams

Quote from @John Williams:

Quote from @Peter W.:

Quote from @John Williams:

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!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

 Would I buy the 5 homes with negative cash flow? It depends! If you budget the negative cash flow over the course of the hold period and have reserves set aside to fill the gap, there is no problem (assuming your investment meets your target appreciation rates - I understand there is no guarantee there). 

For example, you can buy 5 new construction homes at great price points in my market that would be perfect for this strategy. They certainly do not meet the 1% rule and they may be slightly negative cash flow. However, you'll minimal capex/maintenance/vacancy and the overall return after 5 years could be very strong.

We'll end up agreeing to disagree.  To me, if you aren't at least maintaining 0 cash flow, you're betting too much on appreciation to the investment work.  For instance, if I buy a house 20% down, 5% closing prep costs where the rent matches the mortgage, interest and tax and assume a 5% rent growth and appreciation, I'm expecting an 11% total return which is just not good enough for the hassle involved.  That's about what I'll get in the stock market plus I'll be liquid (as opposed to underwater the first couple of years) and it's just push button.  Real estate needs to make at least 15% to make the effort worthwhile and have a chance for >20%.

 I buy things with 0 excepted cash flow after maintenance, vacancy, and capex savings.  Ended up with negative cash flow due to replacing an air conditioner.  I find 

John - as long as you are still following strict screening criteria I agree for single family. For multifamily or commercial, the rental rate impacts the value of the property. Sometimes worth waiting in that case. 

Quote from @John Williams:

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!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

I agree that pricing a rental too high is a classic mistake than can make it sit, but don't you think encouraging landlords to rent quick will make them compromise on the vetting of the tenants?

I need some advice on managing my property manager. Particularly when it comes to maintenance requests.

Some context: I own two small multi families in Cleveland and they are managed by a PM company (B2B property management). This company charges 15% on top of any maintenance requests in addition to their normal fees but all I need to do is approve the estimates - they do all the work/communication with the contractors.

Recently my PM sent me a few maintenance requests: a $1400 to fix some plumbing in a bathroom (clogged and leaking - contractor says they need to cut the pipes, reroute and replace some plumbing, recaulk. Etc) and another estimate for $800 for lead paint testing. And basically I’m just realizing I don’t know how to know if these are reasonable prices or not? They seem high. On one hand I don’t want to fall victim to overpriced contracts squeezing a naive owner. On the other hand I don’t want to be cheap and losing money in the long run bc I’m not properly fixing things. Does anyone have any resources or advice on how to know better about this? I’m mainly looking to educate myself for the long term.

I also am planning to meet with my PM on Monday to discuss pain points and better expectations, I would love to hear what sort of expectations you set with property managers? What you ask and expect of them (beyond the basics) and what expectations can I further establish?

If I'm a first time rental investor, will I be able to hire a property manager to help me with research, etc. prior to getting my first property or will they only work with you if you already have a property?