Real Estate 1% Rule, Advice-Only Planners, Cost of Being Conservative

Rental Real Estateu2019s 1% Rule (and 50% Rule)

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I had a conversation with a friend this past week about him contemplating turning his home into a rental property and it was a reminder that I needed to mention this in the newsletter:

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Our friends at BiggerPockets originally introduced us to the u201c1% Rule.u201d

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This is a rule of thumb that says you ideally want to get at least 1% of the purchase price in monthly rent on your rental property.

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This means if you bought a $150,000 property, you would ideally want it to earn $1,500 in monthly rent.

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Assuming you purchased the property outright in cash, the way to look at this is that 1% monthly gross return would equate to a 12% annual gross return on your investment.

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But then the other rule of thumb BP introduced us to is the u201c50% Ruleu201d which says you should estimate that 50% of that gross income will be eaten up by operating expenses (taxes, insurance, property management, repairs and maintenance, capital expenditures, etc.).

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If you lose 50% of your 12% gross return, youu2019d expect a 6% net return on this rental property.

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This of course excludes property appreciation, which, while unpredictable, can be estimated at a few percent per year.

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These rules are really useful as back of the envelope reminders on what does and doesnu2019t make for a good potential rental property and can help you quickly eliminate many properties that only provide a fraction of this return.

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Advice-Only Financial Advisory Resources

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One of the most frequent questions I get via email is something like, u201cwhere can I find a FI-friendly financial expert I can hire to ask some specific questions about MY financial situation?u201d

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In chatting with my friend Cody Garrett from Measure Twice Money, he mentioned 3 advice-only financial advisory resources that he recommends.

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Since Iu2019m strongly against advisors that charge an AUM (assets under management) fee, but strongly in favor of advice-only/fee-only advisors, I want to pass along trusted resources when I find them.

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This info is quoted directly from Cody:

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• Nectarine: Starting at $175/hr. for advice (including investments) (1 hour at a time)

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• Abundo Wealth: $189/mo. (after $499 first month) for ongoing advice (including investments)

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• Advice Only Network: An advice-only database to search for an hourly, project-based, or monthly financial planner, including filters for specializations (including FIRE).

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Brad Note: I have zero connection to these companies and earn $0 from you using these links

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The Cost of Being too Conservative

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I had Jesse Cramer on the podcast recently and one thing we discussed was how detrimental it is to included layer upon layer of conservative assumptions into your FI and retirement calculations.

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Some of the ways I see this showing up:

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• Adding to your annual expenses. If your actual annual expenses are $60,000 and your FI Number would be $1.5 million, so many people say, u201coh, Iu2019d better say my expenses are $80k just in case.u201d That increase leads to a new FI Number of $2 million!

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• In addition to making your annual expenses larger, many people insist on a smaller u201csafe withdrawal rate.u201d Theyu2019ll say 3% sounds much u201csaferu201d than the 4% rule of thumb. That person who said their expenses were $80k now has a FI Number of $2.67 million, which is a far cry from their original $1.5 million.

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• Many assume social security will pay out $0. Every expert Iu2019ve heard suggests a u2018worst-caseu2019 of roughly 70% of your current estimated benefits, so to assume $0 from is almost absurd.

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Jesse wrote a great article called u2018The Crushing Cost of Conservative Retirement Planningu2019 and he adds some other factors into this u201cun-reasonable Conservatismu201d (lower investment returns, higher inflation and higher tax rates).

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His example of a 50-year old who could have retired at 55 with realistic assumptions and can now only u201csafelyu201d retire at age 76 with these unreasonable ones is especially stark.

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Thereu2019s a real cost to this combined conservatism, even if each individual projection doesnu2019t seem that unreasonable on its own.

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I have been working on optimizing my finances over the past year or so. After I got a large tax refund back this year, I found out I was withholding way too much. I had my accountant help me figure out how much I should have withheld so I donu2019t have a large refund next year.

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The extra money that comes through on my paycheck is now going toward investing. I will be maxing out my retirement accounts for the second year in a row and even contributing more than I ever have toward my taxable brokerage account!

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Next, I need to figure out how much cash is too much when it could be put to use with investing. Itu2019s hard to not want to save for a bunch of future expenses, but at some point enough is enough and funds can be reallocated as needed.

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Lastly, this is a very privileged and a lucky u201cproblemu201d, each year my financial situation gets better, but it also gets more complicated. No matter how much I try to simplify or automate. It is a mindset shift I still need to make – going from saver to investor, broke to wealthy.

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u2014 Riley

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My family started the journey towards FI in 2017. The last big purchase wenmade before listening to “The Simple Path To Wealth” was a “reasonable”nhybrid car under $30,000. (new from the dealership, trading in a two yearnold underwater car and rolling in the negative equity). Just regular middlenclass decision making. In fact, I listened to the audiobook and thenChooseFI podcast on my commute, in this car!

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Since then we have taken many actions to get closer to FI, but we have alsonavoided some other actions, like buying cars. After 8 years driving ourncar, it finally hit 100,000 miles. I feel proud for holding on to a greatncar, and avoiding talking myself into buying a luxury car once a year.

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u2014 Josu00e9

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I’m a huge fan of credit card rewards. I pay everything I can with a credit card and then pay the balance off each month. However, my husband needed to get a dental implant. I asked if they did pay in full cash discounts. They said yes, it would be a 20% discount, which was over $400 off the original bill. This was a much better savings then the rewards I would have gotten had I used my credit card.

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u2014 Annie

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My wife received a letter from her employer stating she can no longer max out her FSA Dependent Care Account. Which only allows a maximum yearly contribution of $5,000 per year to be used for daycare expenses. She is now only able to contribute $1,200 per year to the FSA Account because of her income…

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So, the 1% win was increasing her 457b contribution amount, since we are no longer able to max out the FSA Dependent Care Account.

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u2014 Chris

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My win was buying surfboards. My 9 year old asked if we could go surfing together. She just finished a week of surf camp and just loved it. “I can teach you mom” she said. We live by the beach, and I don’t know how to surf. We are nearing CoastFI, my husband is starting to work less and I homeschool our kids.

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When my daughter invited me to surf with her, I realized I only have a few years where I could easily go out with her. What is the point of FI if not saying yes to when your 9 year old wants to go surfing with you? So I bought boards and put surf days on the calendar.

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u2014 Marilyn

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I hope my 1% this week turns into a 1000%, just not for me personally. I’ve always been rather reserved and followed in my parents’ footsteps of “not bothering to talk about money with family”. As I sat at my only sister’s wedding this weekend, I looked around and saw the elated faces of my extended family watching her start another part of her life. It was contagious. All I wanted in that moment was to play my part and let my sister and her new husband know the freedom I’ve felt working towards financial independence.

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Once the party died down, I ordered a copy of “The Simple Path to Wealth”, wrote down the words about why this path matters to me in the cover, and made sure it ended up in her house when they come back from the honeymoon.

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My personal spreadsheet says I’m less than 10 years from FI. I want the same for all my family. But getting over my reservation to talk about money with family starts with my sister. 1% at a time.

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u2014 Russell

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