[quote user=MarkTorgerson] The 1% rule is a great rule of thumb. I use it all the time for doing a quick analysis in my head. For those saying the math doesn't work....simply run it through. A $150,000 property at 80% financing at 3.5% for 25 years is roughly $600/month. Take the monthly revenue of $1,500 (1% of $150,000) deduct taxes, maintenance, insurance, .. etc and it still cash flows VERY well.
I think this depends on an individual's definition of "very well". 80% financing on a $150k property is $120k mortgage and $30k equity. Monthly revenue of $1,500 deducting expenses leaves $750 per month; deducting $600/month in financing leaves $150 per month or $1800 per year. This is a cash-on-cash return of 6% ($1800/$30k) which, in my opinion only, is very bad considering the amount of leverage used. Also, any "hiccup" during the year can easily wipe out a large portion of the $1800.
Although a 6% yield isn't common, it isn't terribly difficult to achieve. One wouldn't need to use such large amounts of leverage to get it either.
[quote user=Darr]Every dollar of leverage reduces your ROE.
Actually, every dollar of leverage increases returns on equity.
[quote user=ThomasBeyer]Properties that cost $60,000 and rent for
$1200 or 2% exist where in the US with no or little value depreciation
risk ? Propertirs that cost $100,000 and rent for $1000/month or 1%
exist where in Canada ?
I can't speak for others and I can't speak for Canada. However, looking at my investments in the city of Phoenix, AZ they range from 1.5% to 2.1% "rule".
The 1.5% (worst) is from a detached 3 bed 2 bath home I purchased for $55k and rents for $850 per month and the 2.1% (best) is from a 2 bed 2 bath condo I purchased for $35k and rents for $750 per month.
On average, for better or worse, with regards to the "1% rule", I'm executing at a 1.7% to 1.8% rule.
I'm currently negotiating with the owner of a 16 unit multi-unit in Phoenix, AZ that has 3 vacant units and currently brings in $76k in gross rents ("pro forma" with the all units rented is around $96k). Separately metered. The price we're dancing around is $450k. That's a 1.7% rule. He is offering 80% VTB with terrible terms, but we'll see how that turns out over the next few days.
To say that a 1% rule is difficult to find is kind of true, but most people who say it aren't really looking hard enough or in the right places.
Again, I may be biased, but I don't believe that the 1% rule works. Either way, I don't use it because I actually enjoy making money.