Do you follow 1 percent rule

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

Quote from @Michele Velazquez:

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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Scott AllenBusiness Member
Real Estate Agent · Columbus, OH · Member since 2020 · 449 posts · 471 votes
4y
@Michele Velazquez
You can still find a 1% rule in certain parts of Columbus, OH.
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Kevin PolitePro Member
Investor · Decatur Atlanta, GA · Member since 2011 · 610 posts · 232 votes
4y
It seems the 1% rule of thumb, in today’s market, only applies in cities where there is slow to no growth in terms of population and job growth. Fast growing large cities like Austin & Atlanta or smaller like Boise, where homes are appreciating due to the increase in jobs and population, 1% is just not possible. 10 years ago during the depth of the recession, yes, but not today. You can still make money and find deals that cash flow but it’s difficult. These types of cities will continue to grow and real estate assets in those cities will appreciate much more than slow/no grow cities.
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Ryan KellyBusiness Member
Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
4y
@Kevin Polite well stated. I don't follow the 1% rule, but rather the cash flow rule. Pretty simple, how can I get the property to cash flow positive in year one? If I can't, then I move on.
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Shane Kelly
Real Estate Agent · Cleveland, OH · Member since 2021 · 383 posts · 361 votes
4y
You can find close to the 2 percent rule on market here in Cleveland. If you look off market, you can find it even easier. I think you're looking in the wrong areas/cities. Because class of area matters too. Where I find 2 percent on market it's usually a B- to C- area. If you're looking at A, you're not gonna find anything. Even here.
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Kevin PolitePro Member
Investor · Decatur Atlanta, GA · Member since 2011 · 610 posts · 232 votes
4y
Quote from @Shane Kelly:

You can find close to the 2 percent rule on market here in Cleveland. If you look off market, you can find it even easier. I think you're looking in the wrong areas/cities. Because class of area matters too. Where I find 2 percent on market it's usually a B- to C- area. If you're looking at A, you're not gonna find anything. Even here.
Cleveland is perfect example. No disrespect, but it has lost population for the last 70 years so home prices would tend to be cheaper with higher cash flow. I think those are the trade offs you have to make. I doubt you get 1% here in Atlanta in class C
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
4y
There’s are so many more factors that go into buying a property than the 1% rule. That is out dated and was primarily used to pencil a property in 10 seconds
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Kalim Kalla
Investor · Atlanta · Member since 2022 · 19 posts · 29 votes
4y
Quote from @Chris Davidson:

@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.
Book was written in 2017 in my brief diligence.
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Jared HottleBusiness Member
Real Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
4y
I do, still exists in my market and many midwest markets. Sounds like your looking in more appreciation markets so I think going under the 1% rule does make sense but I think many more factors come into play. Location, rental trends, job trends, path of progress, short term rental options but with that risk comes greater reward sometimes
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Michael K.
Investor · Chicago, IL · Member since 2018 · 352 posts · 176 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?

Well, it's more of a suggestion than it is a rule. Right now it is hard to find in most markets. Would have been easier 10 years ago when the market bottomed out from the housing crisis. That said, you can still make money on homes that don't meet the rule. How much money will depend on specifics like vacancy rates, repairs, whether or not you self-manage, and property taxes. Run the numbers and look for something with a good margin, where you should still be safely cash flowing every month. Having a property that makes ome money but doesn't meet the 1% rule is still better than not owning any real estate at all.
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Michele Velazquez
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Member since 2019 · 144 posts · 46 votes
4y
Quote from @Michael K.:

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?

Well, it's more of a suggestion than it is a rule. Right now it is hard to find in most markets. Would have been easier 10 years ago when the market bottomed out from the housing crisis. That said, you can still make money on homes that don't meet the rule. How much money will depend on specifics like vacancy rates, repairs, whether or not you self-manage, and property taxes. Run the numbers and look for something with a good margin, where you should still be safely cash flowing every month. Having a property that makes ome money but doesn't meet the 1% rule is still better than not owning any real estate at all.

Totally agree. That book was actually published in 2017 so that makes sense.
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Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Jared Hottle:

I do, still exists in my market and many midwest markets. Sounds like your looking in more appreciation markets so I think going under the 1% rule does make sense but I think many more factors come into play. Location, rental trends, job trends, path of progress, short term rental options but with that risk comes greater reward sometimes

Thanks. Well I hope I am doing it right. I want to invest out of state so I can invest anywhere but didn't know what city. So I just read a bunch of articles with the top cities to invest in this year. Do you think that is a good strategy to find a location? I felt like I was looking for a needle in a haystack trying to decide on which market to invest in with a million cities being an option.
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Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Kalim Kalla:

Quote from @Chris Davidson:

@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.
Book was written in 2017 in my brief diligence.
Yes it was. So good point that things have changed quite a bit!
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Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Eliott Elias:

There’s are so many more factors that go into buying a property than the 1% rule. That is out dated and was primarily used to pencil a property in 10 seconds

Yes i definitely understand that. But it seemed like he was saying to use that to determine if you want to even analyze the property further yet I could hardly find any properties meeting that ;)
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Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Kevin Polite:

It seems the 1% rule of thumb, in today’s market, only applies in cities where there is slow to no growth in terms of population and job growth. Fast growing large cities like Austin & Atlanta or smaller like Boise, where homes are appreciating due to the increase in jobs and population, 1% is just not possible. 10 years ago during the depth of the recession, yes, but not today. You can still make money and find deals that cash flow but it’s difficult. These types of cities will continue to grow and real estate assets in those cities will appreciate much more than slow/no grow cities.

Got it, thank you!
1 Reply
Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Shane Kelly:

You can find close to the 2 percent rule on market here in Cleveland. If you look off market, you can find it even easier. I think you're looking in the wrong areas/cities. Because class of area matters too. Where I find 2 percent on market it's usually a B- to C- area. If you're looking at A, you're not gonna find anything. Even here.

Ok, sorry but I don't know what class areas mean? Where can I learn more about that?
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Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Kevin Polite:

Quote from @Shane Kelly:

You can find close to the 2 percent rule on market here in Cleveland. If you look off market, you can find it even easier. I think you're looking in the wrong areas/cities. Because class of area matters too. Where I find 2 percent on market it's usually a B- to C- area. If you're looking at A, you're not gonna find anything. Even here.
Cleveland is perfect example. No disrespect, but it has lost population for the last 70 years so home prices would tend to be cheaper with higher cash flow. I think those are the trade offs you have to make. I doubt you get 1% here in Atlanta in class C

Kevin, in your opinion would Cleveland be good for me if my goals are cash flow and decent appreciation? Also, where can I find more information about class a, b, c? I am new and haven't seen that in my books but do see it coming up here? There is so much to learn but I really want to buy something and put my money to work!
0 Reply
Kevin PolitePro Member
Investor · Decatur Atlanta, GA · Member since 2011 · 610 posts · 232 votes
4y
Quote from @Michele Velazquez:

Quote from @Kevin Polite:

Quote from @Shane Kelly:

You can find close to the 2 percent rule on market here in Cleveland. If you look off market, you can find it even easier. I think you're looking in the wrong areas/cities. Because class of area matters too. Where I find 2 percent on market it's usually a B- to C- area. If you're looking at A, you're not gonna find anything. Even here.
Cleveland is perfect example. No disrespect, but it has lost population for the last 70 years so home prices would tend to be cheaper with higher cash flow. I think those are the trade offs you have to make. I doubt you get 1% here in Atlanta in class C

Kevin, in your opinion would Cleveland be good for me if my goals are cash flow and decent appreciation? Also, where can I find more information about class a, b, c? I am new and haven't seen that in my books but do see it coming up here? There is so much to learn but I really want to buy something and put my money to work!
All of my properties are no more than 15 minutes away from where I live as I self manage. For me, it would be extremely difficult to invest in an area I know nothing about or couldn’t check out on a regular basis, but that’s the control freak in me. I know others that are quite comfortable doing that. I don’t know enough about Cleveland to advise one way or another.
Class A are the most expensive and have the highest rents. Class B & C in my definition, are the bread & butter. I like finding properties in C areas that I believe will become B in 3-5 years. It’s all relative as what I call C someone else would call D. D cash flows the best, but usually aren’t safe and have renters with subpar credit.
1 Reply
Lee Yoder
Rental Property Investor · Lebanon, OH · Member since 2016 · 220 posts · 228 votes
4y
Seeing comments like, "The 1% rule is outdated" and "You can't find that anymore" are signs of being at the top of the market cycle in my opinion. I'm not saying you have to follow this rule, but it seems like when you can't come close to the 1% rule for a rental, you're counting on appreciation. Granted, that strategy has worked fantastically well for 10 years, and maybe it will continue to work. But, maybe it won't...
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Alex BekezaBusiness Member
Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
4y
@Michele Velazquez Looking for a strong rent to price ratio is important but you also want to make sure you're not trading perceived cash flow potential for significant capex which wipes clean your profits. I bring this up because a lot of midwestern markets come to mind with very old buildings which are going to exceed the 1% rule but you'll want to be very thorough in your due diligence to identify any potential capital expenditure issues up front.
[email protected]818-606-8823
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Brandon GoldsmithBusiness Member
Real Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
4y
The 1% rule is a good metric to use but I would keep in mind all factors. If a property is very under rented and doesn't hit the rule but would if the rents were at the market is often times a situation that investors ignore the potential. There are a handful of markets you might want to check out here in Ohio that would still hit that metric @Michele Velazquez
[email protected]614-963-3340
2 Reply
Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Alex Bekeza:

@Michele Velazquez Looking for a strong rent to price ratio is important but you also want to make sure you're not trading perceived cash flow potential for significant capex which wipes clean your profits. I bring this up because a lot of midwestern markets come to mind with very old buildings which are going to exceed the 1% rule but you'll want to be very thorough in your due diligence to identify any potential capital expenditure issues up front.

Great advice. This is something my relator will help me with when we do inspections correct?
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Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Kevin Polite:

Quote from @Michele Velazquez:

Quote from @Kevin Polite:

Quote from @Shane Kelly:

You can find close to the 2 percent rule on market here in Cleveland. If you look off market, you can find it even easier. I think you're looking in the wrong areas/cities. Because class of area matters too. Where I find 2 percent on market it's usually a B- to C- area. If you're looking at A, you're not gonna find anything. Even here.
Cleveland is perfect example. No disrespect, but it has lost population for the last 70 years so home prices would tend to be cheaper with higher cash flow. I think those are the trade offs you have to make. I doubt you get 1% here in Atlanta in class C

Kevin, in your opinion would Cleveland be good for me if my goals are cash flow and decent appreciation? Also, where can I find more information about class a, b, c? I am new and haven't seen that in my books but do see it coming up here? There is so much to learn but I really want to buy something and put my money to work!
All of my properties are no more than 15 minutes away from where I live as I self manage. For me, it would be extremely difficult to invest in an area I know nothing about or couldn’t check out on a regular basis, but that’s the control freak in me. I know others that are quite comfortable doing that. I don’t know enough about Cleveland to advise one way or another.
Class A are the most expensive and have the highest rents. Class B & C in my definition, are the bread & butter. I like finding properties in C areas that I believe will become B in 3-5 years. It’s all relative as what I call C someone else would call D. D cash flows the best, but usually aren’t safe and have renters with subpar credit.

I understand. I live in Orange County, CA so not really an option for me to invest here. Thank you for explaining that to me.
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Steven Foster Wilson
Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
4y
Quote from @Brandon Goldsmith:

The 1% rule is a good metric to use but I would keep in mind all factors. If a property is very under rented and doesn't hit the rule but would if the rents were at the market is often times a situation that investors ignore the potential. There are a handful of markets you might want to check out here in Ohio that would still hit that metric @Michele Velazquez

I agree with Brandon! There are also places here in the Ohio markets that bring great cashflow and appreciation.
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Michele Velazquez
OP
Member since 2019 · 144 posts · 46 votes
4y
Quote from @Steven Foster Wilson:

Quote from @Brandon Goldsmith:

The 1% rule is a good metric to use but I would keep in mind all factors. If a property is very under rented and doesn't hit the rule but would if the rents were at the market is often times a situation that investors ignore the potential. There are a handful of markets you might want to check out here in Ohio that would still hit that metric @Michele Velazquez

I agree with Brandon! There are also places here in the Ohio markets that bring great cashflow and appreciation.

Which areas should I look at?
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Alex BekezaBusiness Member
Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
4y
Quote from @Michele Velazquez:

Quote from @Alex Bekeza:

@Michele Velazquez Looking for a strong rent to price ratio is important but you also want to make sure you're not trading perceived cash flow potential for significant capex which wipes clean your profits. I bring this up because a lot of midwestern markets come to mind with very old buildings which are going to exceed the 1% rule but you'll want to be very thorough in your due diligence to identify any potential capital expenditure issues up front.

Great advice. This is something my relator will help me with when we do inspections correct?

Hopefully your realtor will have a referral for a solid inspector. My guy in STL is shockingly thorough and he's one of my favorite people to refer others to because I always know they'll be impressed.
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