@Patrick Menefee
I hear you there, especially in this economy, with the housing market where it is at and in your community, it is definitely a challenge to overcome.
Another thought... have you ever done a compound interest analysis of 20% down payments? If you do an NPV, comparing to the stock markets long term returns, you will more than likely find that the stock market outperforms (S&P index funds, etc)... Just use Excel to do these..Real estate does better if you can either far exceed the 1% rule (because although it can compound, it doesn't techniquely)...also those that get insanely rich off real estate generally are buying when the economy is in the toilet and time it perfectly (there are other aspects that I'll mention later, before anyone freaks out reading this :).
My opinion is that if you can't either get significantly over 1% or can get houses in the $60-$80K range, or even less, with financing, you will become rich. Nothing to say it's impossible, but on average you'd do just as good (with index funds, etc) if you are in it for the long game-obviously if you are in it purely for the cash flow and immediacy of funds coming into bank account consistently- with a tax shield in place, then disregard. However, I think the majority of people on here, if they went to Excel and used a few analysis formulas, will realize quickly the reason that flipping is so prominent currently is due to the lack of scalability in the real estate market at a certain point (beyond $100,000 homes) the effort vs. reward becomes questionable (not a steadfast/absolute rule, but on average it becomes more questionable...sizable risk vs reward).
Use the following in Excel and see if they help, =NPV (Net Present Value) put your down payment on the outside of the formula and make it NEGATIVE (cash flows go inside)...this will compare to another interest rate (i.e. stock market return compounded at an 8-10% rate)... if you are withdrawing this money consistently obviously this will be different, but both are considering that you are reinvesting and not taking the money and buying fancy Rolexes, cars, etc.... BTW, if it is negative, then you are better off with the stock market or alternative investment than what you are considering. (For example =NPV(.10,3500,3500,3500,3500,3500)-70000... if you increase by 3% every year, you can factor that in, etc
Another formula to checkout is the =IRR ( Internal Rate of Return)... this will tell you what kind of return you are getting if you were to reinvest all of your money at the interest rate of the return that you are getting from your houses... super useful formula.. again, if negative, look at something else... (this is just telling you if I keep buying houses at the same price point and get the same rents with the same down payments, using the same money, how am I doing).
Additionally, take a look at the =PV (Present Value) and =FV (Future Value) formulas... these formulas can show you, for example, if you are investing $40,000 into a down payment (i.e. on an $200,000 house) and not getting 1% (lets assume .08% of ARV) $1,333 a month in rent and about $900 is going to mortgage and taxes/insurance... you would be making ROUGHLY $200-$300 a month CF (Cash flow) after expenses/vacancies... or $2,400 a year... based on a $40,000 investment you are looking at a 6% return on your money... if you do that for ten years, it can tell you what that $40,000 is worth in ten years at 10% compounded vs. 6% (assuming you are taking the 6% and ENTIRELY reinvesting back into another house). (Use these formulas to help you look at $40,000 in ten years invested in housing or $40,000 in ten years invested in real estate.... even try 20 years).
Anyways, I know this wasn't directly answering your question, but it was more to show you another way of looking at why the 1% rule is a rule... if you aren't getting that and are playing for appreciation or debt paydown + cash flow.. just be careful. If you have another strategy, maybe if you are trying to reduce your taxable income by taking passive losses, while still getting principal paydown and equity build up through appreciation, that is a whole other topic... but from a purely basic investment standpoint, you want to at least get 1% if possible.
Hope this helps.
Sincerely,
Scott
