Lots of real estate investors talk about the 1% rule. It is worthwhile to know but it isn't really a rule and it might not apply to you.
What It Is
"A property must rent for at least 1% of its purchase price each month".
A $100,000 property must rent for at least $1,000 a month.
A $200,000 property must rent for at least $2,000 a month.
You can flip it around and say that a property shouldn't cost more than 100 times it's monthly rental rate. If rent for a property is $1,000 then you shouldn't pay more than $100,000 for it.
Why Is It A Rule?
Some investors make it a rule for their investing strategy. "This property doesn't meet my 1% rule, I'm not buying it!"
Why Is It Popular?
It is a great way to quickly filter properties. If it doesn't meet the rule, you know to skip it and keep looking. If it does meet the rule you can take a closer look at the numbers to see if the property really is a good match for you.
It is a great way to quickly analyze a property to see if it will be profitable for you. On a $100,000 property, a 30 year mortgage should have monthly payment of $500 or less. That leaves you with $500 a month to pay for repairs, vacancies, taxes and set aside some cash for capital expenditures each month. What's left over is what you can put in your pocket.
The idea is that %1 of the purchase price each month will give you enough money to pay all expenses and still make a profit. But of course you'll want to run all the numbers before you purchase a property and not only depend on the 1% rule.
Why It Doesn't Always Work
Not all markets are the same. Maybe property taxes are higher in your area. Maybe there are expensive HOA fees. Maybe the area is growing rapidly and you're counting on appreciation more than cash flow. In these cases you might be looking for other qualifying criteria and you don't really care about the 1% rule.
Can It Be More Than 1%?
Yes it can. Maybe the area isn't desirable to live but industry brings in a lot of temp workers. In this case people don't really want to buy and own houses but the demand for rentals can be high. Maybe you find a special deal where the owner doesn't want to put it on the market and just wants to get rid of it quickly, you can beat the 1% rule if you find a good deal.
Making Your Own Rule
The 1% rule might work well for you, but if it doesn't come up with your own simple criteria to quickly determine if a property is worth your time. Try to keep it simple if you can. Another reason the 1% rule is popular is because it is very easy to do the math in your head.
Hope that helped, see you next time -Billy