Do you follow 1 percent rule

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Do you follow 1 percent rule

Michele Velazquez
Member since 2019 · 144 posts · 46 votes

I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?

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Kalim Kalla
Investor · Atlanta · Member since 2022 · 19 posts · 29 votes
4y
Quote from @Michele Velazquez:

I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?


 Throughout the Atlanta area it is significantly hard to find a 1% rule unless you are getting a direct deal from a seller that has a mispriced property. Pretty rare to find one and it doesn't take into consideration much of the effect of rates increasing which still effects your projected cash flow. I have met people that don't care about any sort of timeline and try to build their portfolio and or business off of home runs, but that's no way to build. If you aim for the singles or doubles (deals that are under 1% but still make sense) then you'll be poised to build/grow more successfully. 

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  • Kalim Kalla
    Investor · Atlanta · Member since 2022 · 19 posts · 29 votes
    4y
    Quote from @Michele Velazquez:

    I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?


     Throughout the Atlanta area it is significantly hard to find a 1% rule unless you are getting a direct deal from a seller that has a mispriced property. Pretty rare to find one and it doesn't take into consideration much of the effect of rates increasing which still effects your projected cash flow. I have met people that don't care about any sort of timeline and try to build their portfolio and or business off of home runs, but that's no way to build. If you aim for the singles or doubles (deals that are under 1% but still make sense) then you'll be poised to build/grow more successfully. 

    10Reply
  • Michele Velazquez
    OP
    Member since 2019 · 144 posts · 46 votes
    4y
    Quote from @Kalim Kalla:
    Quote from @Michele Velazquez:

    I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?


     Throughout the Atlanta area it is significantly hard to find a 1% rule unless you are getting a direct deal from a seller that has a mispriced property. Pretty rare to find one and it doesn't take into consideration much of the effect of rates increasing which still effects your projected cash flow. I have met people that don't care about any sort of timeline and try to build their portfolio and or business off of home runs, but that's no way to build. If you aim for the singles or doubles (deals that are under 1% but still make sense) then you'll be poised to build/grow more successfully. 


     Thanks so much. That's why I was wondering if people follow it because it didn't add up. Do you own sfh or multi family units?  

    0Reply
  • Chris Davidson
    Real Estate Agent · Boise, ID · Member since 2016 · 1k+ posts · 888 votes
    4y

    @Michele Velazquez check copyright date, and then think of what part of the market cycle we were in during publishing. A lot of older books have really good info, but to take a rule like that and run with it will have you standing on the sidelines in this market. Rules are just to help weed out properties, you still have to take the time and underwrite the deal to see if it works. At that point you can see how those rules compare.

    Best of luck.

    5Reply
  • Kalim Kalla
    Investor · Atlanta · Member since 2022 · 19 posts · 29 votes
    4y
    Quote from @Michele Velazquez:
    Quote from @Kalim Kalla:
    Quote from @Michele Velazquez:

    I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?


     Throughout the Atlanta area it is significantly hard to find a 1% rule unless you are getting a direct deal from a seller that has a mispriced property. Pretty rare to find one and it doesn't take into consideration much of the effect of rates increasing which still effects your projected cash flow. I have met people that don't care about any sort of timeline and try to build their portfolio and or business off of home runs, but that's no way to build. If you aim for the singles or doubles (deals that are under 1% but still make sense) then you'll be poised to build/grow more successfully. 


     Thanks so much. That's why I was wondering if people follow it because it didn't add up. Do you own sfh or multi family units?  

    Own single family, But I spend my days as an investment focused real estate agent sourcing about 10 deals per month for my clients. I analyze around 20 deals per day from a fix and flip perspective as well as BRRRR. Allows me to see a lot of the shifts in the market as they happen as well as the broader investor mentality and capability. All through last year I had a lot of clients that were not happy with cash flows at 3-400$ a month on well appreciating areas that had upside with ARV especially when it came to refinancing during the end of last year at such low interest rates. Market waits for no-one and they were too slow to cash in the chips. I see a lot of investors turning to STR strategies to maximize their cash flow currently daily and monthly rents are creeping higher slowly but surely. 
    6Reply
  • Ashlee Hutson
    Real Estate Agent · Pearland, TX · Member since 2019 · 59 posts · 34 votes
    4y

    @Michele Velazquez As others have said, it is extremely difficulty to find a property in Houston that follows the 1% rule. Especially a property listed on the MLS. As long as you have underwritten the deal and the numbers make sense for you, then that is all that matters. The 1% rule is an outdated metric in the current market.

    9Reply
  • Manny VasquezBusiness Member
    Real Estate Agent · Orange County · Member since 2022 · 318 posts · 293 votes
    4y

    I totally agree with @Ashlee Hutson.  The 1% rule is totally outdated.  If the deal makes sense to you, then go for it.  There are many areas in the nation where the 1% rule doesn't apply, however in some locations, the property will go up in value and so will the rents where you may be getting more than the 1% rule!  For example, in Orange County California (where I"m from), in today's market you will not find a property that fits the 1% rule.  However, if you were to purchase said property and hold it for say 10 years, the property value and the rents will both go up.  And at that point you may be getting more than the 1% rule.  In some areas, the trick is to buy and hold long term.

    3Reply
  • Conner Olsen
    Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes
    4y
    Quote from @Michele Velazquez:

    I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?


     Austin: $400,000 house with $1,950 in rent
    You can get 1% if you market it as a MTR or STR.

    2Reply
  • Justin Moy
    Investor · Kansas City, MO · Member since 2020 · 400 posts · 278 votes
    4y

    depends on the market. In some of those major markets you listed, price pressures will make it very difficult to get to 1% as some investors are banking on appreciation. Also if it's a value-add deal then likely you won't hit the 1% rule at least not from the start. 

    1Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    4y

    Hello, all mine are at least 2% , (20% NET caps). For example. Rent 20k, all in 60k net 13k, Rent all in 45k, rent 12k, net 8k, , etc. Its all about your team and knowledge,

    good luck 

    2Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    4y

    @Michele Velazquez I've found staying close to it works out well but you absolutely need to do a full analysis

    [email protected]512-888-9122
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    2Reply
  • Anayo Awuzie
    Member since 2020 · 15 posts · 11 votes
    4y
    Quote from @Michele Velazquez:

    I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?


     So what rule are most using now to determine value of a deal? I haven't found anything that hits it either and I know I'm missing out because of it 

    0Reply
  • Ezra Henderson
    Wadsworth, OH · Member since 2021 · 110 posts · 91 votes
    4y

    I'll be honest here where I live in Ohio I hit the 1% every time. If not more. But I never analyze a deal using that rule. It's a good basic guideline, but there is SO much more that goes into analyzing a property. CapEx, taxes, the area, etc.

    4Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    I started my REI journey in 1982. Never heard of the 1% rule until I saw it on this forum one day.......

    I don't like rules. Make your own........

    7Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    Feel free to click on the magnifying glass in the upper right. You’ll see this is literally asked monthly if not weekly, if not daily. It wasn’t meant to be a rule it was shortcut to save time 10 years ago. It was a vague idea for one person in one market. 

    It doesn’t account for property age, property condition, insurance rates, property tax rates, income tax, rent control, weather, population, price, or location. (Plus 20 things I didn’t think of.)

    You’d lose you butt getting 1% rent on a $10,000 home in the great white north and you’d make a killing getting 0.8% on a $400,000 house in Nevada. 

    1) If you want to find out if you can make money on rentals in a market, find out if there are any rentals in that market. If there are, those landlords are probably making money. They might be making less money or a different kind of money (tax savings, appreciation, inflation hedge, etc etc) than you want but it’s probably not a charity. 

    2) don’t look at any property’s year 1 numbers, they just don’t matter. Take your numbers and adjust rent/taxes/insurance for year 5 or year 10 and then calculate the next 10-20 years. Those are the years that matter. I mean that because your rent should increase more than your expenses, and your property should appreciate, both making the numbers look better. (Imagine lowly 5% appreciation on your 20% downpayment, better knows as a 25% return. ) but it’s also important the other way. What if it’s making great money year 1 but the taxes are going up and the population is going down? You make good money 2 years<  decent money 2 years then you lose money for the east of time? No thanks. 

    While you don’t have to repeat others mistakes many/most of the names you recognize on BP started and even succeeded before BP. Take all this info as a bonus, not a requirement or a rule book. And GOOD LUCK. :-)

    8Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Michele Velazquez:

    I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?


     This 1-2-3 percent rule only work when price is cheap like 12 years ago, somebody needs to revise those book. 30 years from now people going to write "0.1 percent rule for home investing"

    1Reply
  • James Hamling
    Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
    4y
    Quote from @Michele Velazquez:

    I am reading the book about out of state investing and was wondering, do people follow the 1 percent rule?  I had narrowed down my search to a few cities for where I want to invest in a multi family unit and hardly any of them meet this 1 percent criteria?  In Atlanta, Houston, Austin, Baltimore, Cincinnati... barely any 1 percent?

     The "updated" 1% rule is don't look FOR a 1% deal, look for a deal you can MAKE a 1% deal. 

    And the "inflation" update to that is; "within 36-48mnths of possession". 

    5Reply
  • James Hamling
    Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
    4y

    @Bill B. hit the nail on the head. 

    When reading these books on REI, keep in mind the print date and ask self how much has changed in things you know since then because as much or more has changed in REI in that same time.

    Also, those "rules" put into the books, there more so generalizations and attempts to take how we think, turn it into some kind of words and context for others to get some idea, glimpse, insight, as to how our brains work on things, to start adopting and implementing it yourself. 

    I had deals offered to me back in day of entire packages of properties for $5k a piece that just a few years earlier were $100k each, and I passed, happily so. Low price doesn't mean it's a deal, even big discount doesn't always mean it's a deal. Those $5k were in an area that had come completely unwound, total war-zone, managing them was a nightmare, I know because I know who did buy them, and he regrated it. Break-in's left right and center, stripped copper, holly-cow all the stripping happening to point he just did it himself and left in front yard and posted signs saying "all the plumbing is plastic pipes now". 

    No 1, 3, 5 factors are ever going to be able to say with certainty if something is good or not, it's just not that simple. There is always risk, ALWAYS, what we do is use data to chip away at that risk-mountain until it's a small enough hill where the $$$$ potential is worth the hike up it. So maybe think it more so that way of "what do I need to know, where this starts to make sense and seems worth it". 

    That's the only universal rule that will stand true in every market and every cycle, is it worth the risk?

    2Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y

    yes, every city has its own 'default cap rate' regardless of the asset, it could be MF, single family or what not. You can always use zillow home index/rent sample to guess the cap rate. When asset price rise, there will be cap rate compression. So a class C home in zipcode 95113 could have 7% cap rate in 2009, but in 2022 the same house could have 2% cap rate. So it's very dynamic. But in zipcode 35005, the cap rate could be 11% in 2009 and 9% in 2022. Why ? because the house in that zip code doesn't appreciate that much.

    So I repeat again, in every city there's hidden cap rate. Company like Flocks or arrived homes are smart enough that for their class A purchase out of midwest, is giving only 3% back to investors. That number is quite right.

    If you are lazy enough to find the cap rate just open loop net

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    4y

    I follow the 25% IRR hurdle rule for active investments. Otherwise, it's best (for me) to just invest passively with others and get returns in the teens.

    1Reply
  • Curtis Mears
    Property Manager · Raleigh, NC · Member since 2014 · 729 posts · 596 votes
    4y

    @Michele Velazquez

    Not in Raleigh, nc

    0Reply
  • Benjamins ZonisPro Member
    Investor · Baltimore, MD · Member since 2021 · 1 post · 0 votes
    4y

    @Michele Velazquez. I follow 1% rule in Baltimore

    0Reply
  • Paul Smythe
    Investor · Greenville, SC · Member since 2012 · 269 posts · 187 votes
    4y

    The 1% rule is my go-to initial litmus test for any property I'm underwriting. Still as relevant as ever in my book. We have a real hard time generating cash flow in my area if the 1% rule isn't met. Property taxes kill most deals when you get under 1%.

    Maybe if you're not aiming for cash flow it can make sense, but buying at worse than 1% is a really risky proposition to me. You've got to really like the area you're buying in at that point.

    1Reply
  • Michele Velazquez
    OP
    Member since 2019 · 144 posts · 46 votes
    4y
    Quote from @Bruce Woodruff:

    I started my REI journey in 1982. Never heard of the 1% rule until I saw it on this forum one day.......

    I don't like rules. Make your own........


     Interesting. So many people in this forum told me to buy the book, "Long Distance Real Estate Investing" by David Greene and its in there. It's in all the Bigger Pocket books?

    0Reply
  • Bud Gaffney
    Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
    4y

    It all depends on the area! It's a good start, but shouldn't be the only consideration.

    0Reply
  • Patrick DruryBusiness Member
    Real Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
    4y

    @Michele Velazquez
    You can still find deals that meet the 1% rule in Cleveland OH. Cincy doesn't have as good of cash flow as Cleveland does. 

    [email protected]614-412-4565
    Reafco-556 Reviews
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