The 1% rule is kind of an industry standard in my area. If a property reaches the 1% rule, it is typically a solid long-term investment. There are a lot of other things which can make this untrue, however, it is a guideline we keep in mind.
What does the 1% rule mean? It means, for every $10,000 you spend on a property, you want to receive $100 a month in rent. So, if you buy a $100,000 single family house, you would want to receive $1,000 a month in rent.
Why is this important? This is a simple benchmark to look at when purchasing real estate as an investment. It is a simple way to make sure the investment you are buying will most likely be profitable. Now, there are many things which can make this statement untrue. Like, high vacancy (the property you are looking at has high turnover), neglected capital expenditures (needs siding, roof, windows, foundation work, furnace, any big ticket item), it needs updating (flooring, new kitchen, paint, drywall repair, tub, shower, vanity, trim, appliances, etc), or the owner has to cover utilities. These are some of the main things off of the top of my head, which can make the 1% rule become ineffective.
However, if the property has had regular maintenance and has been updated throughout the years, you have reasonable rent for your area, and the tenant covers most or all utilities, you should be pretty safe. I use the 1% rule when looking for investments to park my money in or what a property may look like when I finish the BRRRR process on it. I will explain the BRRRR process in another blog. Otherwise if you are interested in the BRRRR process, David green wrote a book on it.
I want to give you guys a quick example of a 1% rule property and how the numbers would look.
- Purchase price = $100,000
- Money down = $20,000
- Loan amount = $80,000
- Interest rate 3%
- Loan term 30 year fixed
- Monthly costs listed below:
- Mortgage payment = $337.28
- Cap ex saving 8% = $80
- Maintenance saving 8% = $80
- Property Management fee 8% = $80
- Insurance = $50
- Property taxes = $165
- Total monthly cost = $792.28
- Monthly cash flow (profit) = $207.72
- Cash on cash return of 12.4%
This would be a pretty good deal. You do not have to manage the property, so it is mostly passive income (you still have to manage your management company). You are saving $160 a month for repairs. You are getting asset paydown (someone is paying down the loan on your property, giving you more equity). You have a tax benefit (a depreciating asset). All while receiving $207.72 a month in cash flow (profit).
This is why the 1% rule can be quite effective as long as the house is in good condition.
I hope this helps and if you are interested in me doing more real estate blogs, please let us know 🙂
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