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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  • Michele Velazquez
    OP
    Member since 2019 · 144 posts · 46 votes
    4y
    Quote from @Alex Bekeza:
    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.  


     STL?

    1Reply
  • Alex BekezaBusiness Member
    Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    4y

    Saint Louis Missouri (Norm from Sage Inspections).  

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  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    4y

    @Michele Velazquez

    You should have your own investment goals and look for multifamily deals that fits in your investment goals.

    Multifamily deals can be analyzed through various matrix like NOI, Cap rates, IRR etc.

    Each investor looks for specific matrix depending on their investment goals.

    I suggest that you clearly define your criteria and what you are looking for.

    Based on the area you choose, a local Investor-Agent can help shorten your learning curve and save you a lot of headaches as they tend to understand the market better.

    All the best!

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

    That’s the problem. Property tax and insurance are both double in MN compared to NV. The properties are twice as old, I need to pay for lawn care and snow removal in MN, and I pay state income tax. Tell me how I can use the same “rule” for both of my markets. 

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

    @Michele Velazquez

    You should have your own investment goals and look for multifamily deals that fits in your investment goals.

    Multifamily deals can be analyzed through various matrix like NOI, Cap rates, IRR etc.

    Each investor looks for specific matrix depending on their investment goals.

    I suggest that you clearly define your criteria and what you are looking for.

    Based on the area you choose, a local Investor-Agent can help shorten your learning curve and save you a lot of headaches as they tend to understand the market better.

    All the best!


     Totally agree.  And I do have my investment goals determined.  Just had this question.  I am still narrowing down the city I am interested in but then of course will be building my core 4

    0Reply
  • James Hamling
    Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
    4y
    Quote from @Michele Velazquez:
    Quote from @Wale Lawal:

    @Michele Velazquez

    You should have your own investment goals and look for multifamily deals that fits in your investment goals.

    Multifamily deals can be analyzed through various matrix like NOI, Cap rates, IRR etc.

    Each investor looks for specific matrix depending on their investment goals.

    I suggest that you clearly define your criteria and what you are looking for.

    Based on the area you choose, a local Investor-Agent can help shorten your learning curve and save you a lot of headaches as they tend to understand the market better.

    All the best!


     Totally agree.  And I do have my investment goals determined.  Just had this question.  I am still narrowing down the city I am interested in but then of course will be building my core 4


     Unless your a syndication or some other crowd funded capital I think your nutz for doing a multi in todays market unless it's a total ran down mess that has a clear path of significant value-add. Mainly because that's exactly who your competing with, at volume, for the deals. They don't need 8 caps, 5 is fine because there focus is not on the deal as much as it is the capital management. I see this 1st hand live-time.    We have 1 client that nobody and i do mean nobody can operate at there buy-box and it's simply because of there astronomical size and scale, and there not the only one.     

    So no thanks, I will wait for the "maintenance-bomb" to start blowing on all these novice MFH acquisitions made the last 24/36 months. Until then, working where the $ is, SFR.

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    4y
    Quote from @Michele Velazquez:
    Quote from @Wale Lawal:

    @Michele Velazquez

    You should have your own investment goals and look for multifamily deals that fits in your investment goals.

    Multifamily deals can be analyzed through various matrix like NOI, Cap rates, IRR etc.

    Each investor looks for specific matrix depending on their investment goals.

    I suggest that you clearly define your criteria and what you are looking for.

    Based on the area you choose, a local Investor-Agent can help shorten your learning curve and save you a lot of headaches as they tend to understand the market better.

    All the best!


     Totally agree.  And I do have my investment goals determined.  Just had this question.  I am still narrowing down the city I am interested in but then of course will be building my core 4

    I recommend you look into Houston, TX.

    The income and appreciation in Houston are growing at a steady pace.

    I personally have rentals in Houston, and the surrounding areas of Spring and Conroe.

    Good luck!

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  • Michele Velazquez
    OP
    Member since 2019 · 144 posts · 46 votes
    4y
    Quote from @Wale Lawal:
    Quote from @Michele Velazquez:
    Quote from @Wale Lawal:

    @Michele Velazquez

    You should have your own investment goals and look for multifamily deals that fits in your investment goals.

    Multifamily deals can be analyzed through various matrix like NOI, Cap rates, IRR etc.

    Each investor looks for specific matrix depending on their investment goals.

    I suggest that you clearly define your criteria and what you are looking for.

    Based on the area you choose, a local Investor-Agent can help shorten your learning curve and save you a lot of headaches as they tend to understand the market better.

    All the best!


     Totally agree.  And I do have my investment goals determined.  Just had this question.  I am still narrowing down the city I am interested in but then of course will be building my core 4

    I recommend you look into Houston, TX.

    The income and appreciation in Houston are growing at a steady pace.

    I personally have rentals in Houston, and the surrounding areas of Spring and Conroe.

    Good luck!


     That is on my list.  Well the last guy said im nutz to do a multi unti, do you think so too?  I am new to all this so I am just trying to get cash flow and appreciation but certainly don't have to do  mfh if im nuts for it lol

    0Reply
  • Ashlee Hutson
    Real Estate Agent · Pearland, TX · Member since 2019 · 59 posts · 34 votes
    4y
    Quote from @Michele Velazquez:
    Quote from @Wale Lawal:
    Quote from @Michele Velazquez:
    Quote from @Wale Lawal:

    @Michele Velazquez

    You should have your own investment goals and look for multifamily deals that fits in your investment goals.

    Multifamily deals can be analyzed through various matrix like NOI, Cap rates, IRR etc.

    Each investor looks for specific matrix depending on their investment goals.

    I suggest that you clearly define your criteria and what you are looking for.

    Based on the area you choose, a local Investor-Agent can help shorten your learning curve and save you a lot of headaches as they tend to understand the market better.

    All the best!


     Totally agree.  And I do have my investment goals determined.  Just had this question.  I am still narrowing down the city I am interested in but then of course will be building my core 4

    I recommend you look into Houston, TX.

    The income and appreciation in Houston are growing at a steady pace.

    I personally have rentals in Houston, and the surrounding areas of Spring and Conroe.

    Good luck!


     That is on my list.  Well the last guy said im nutz to do a multi unti, do you think so too?  I am new to all this so I am just trying to get cash flow and appreciation but certainly don't have to do  mfh if im nuts for it lol


     I don't think you're nuts. Especially starting with a small multifamily (2-4 units). It's obviously more challenging to find home run deals right now but that doesn't mean there aren't profitable ones out there. 

    0Reply
  • Julien J.
    Investor · CO · Member since 2016 · 757 posts · 1k+ votes
    4y

    Definitely not in the Seattle market.

    0Reply
  • Lucia Rushton
    Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
    4y

    @Michele Velazquez. There is a really good video from BP done earlier this year explaining that the 1% rule was for a different time, it no longer applies. It’s really good, which I had it with me. Search it out probably on the BP YouTube.

    Now I personally use it for a range, a guidance tool to see if something is at .5 or .7 for example but that is it.

    0Reply
  • Shane Kelly
    Real Estate Agent · Cleveland, OH · Member since 2021 · 383 posts · 361 votes
    4y
    Quote from @Michele Velazquez:
    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.  


     If your goal is cashflow, with a little bit of appreciation, then Cleveland sounds perfect. If you want an overview as to what Cleveland's classes of neighborhoods look like and what it all means, you can check out: https://www.biggerpockets.com/...

    If you have any other questions about it, please send me a message since it's easier for me to get back to. Thanks!

    0Reply
  • Will Headen
    Investor · Member since 2022 · 6 posts · 0 votes
    4y

    Yes, as a rule of thumb. Each area is different. But for quick math, 1% then your area qualifier will provide details and save time to pre-qualify "deals".

    0Reply
  • Steven Foster Wilson
    Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
    4y
    Quote from @Michele Velazquez:
    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?  


    I recommend the major cities in Ohio:

    -Columbus, great for appreciation, pp is a bit higher around $220k for multifamily


    -Cincinnati, has a mix of cash flow and appreciation, average multifamily around $180k


    -Cleveland, has alot of cashflow potential, average multiform around $140k


    There are other smaller markets like Dayton, Akron, and and Newark, which we are starting to see these areas boom due to huge investors and corporations like Intel choosing to set up shop in these kind of areas.


    Looking for cashflow? Look into Cleveland, its got good cashflow potential with appreciation happening as well.


    Looking for appreciation come to Columbus, there are still 1% deals, but the more attractive part is the population growth and other economic drivers!

    2Reply
  • Jeff Matthews
    Investor · Las Vegas, NV · Member since 2019 · 18 posts · 0 votes
    4y

    I don't see many deals in Las Vegas qualifying for the 1% rule .(Im sure there are some but I dont think its the rule here )

    0Reply
  • Dustin P.
    Realtor · Tempe, AZ · Member since 2017 · 541 posts · 442 votes
    4y

    Never rely on these rules. Actually evaluate the property, don't be lazy. If it meets your criteria then take steps to move forward. I find so many investors are lazy and do not take time to deep dive a property. It rarely takes more than 20-30 minutes

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

    Never rely on these rules. Actually evaluate the property, don't be lazy. If it meets your criteria then take steps to move forward. I find so many investors are lazy and do not take time to deep dive a property. It rarely takes more than 20-30 minutes


     Well im not lazy. Im taking advice from experienced investors to learn all I can and their recommendations to read several books and the BOOKS recommended this.  So I wanted to find out what people thought because it wasn't adding up.  

    1Reply
  • Remington LymanBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ 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?


     I know a lot of people that follow the 1% rule and invest here in Ohio

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  • Sara Frank
    Realtor · Baltimore, MD · Member since 2020 · 255 posts · 182 votes
    4y

    Can get 1% in some parts of Baltimore if you change lease terms.. I.e. instead of LTR do medium term. Cant do airbnb or any short term unless owner occupied. 

    0Reply
  • Dominic Kosteris
    Member since 2021 · 58 posts · 37 votes
    4y

    Northwest Indiana and Chicago proper have areas where the 1% rule is applicable. Those are my markets.

    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Sara Frank:

    Cant do airbnb or any short term unless owner occupied. 


     In all of Baltimore.....? Wow....

    0Reply
  • Jonathan KlemmBusiness Member
    Moderator
    Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
    4y

    @Michele Velazquez - You can still find 1% rule deals but they definitely aren't going to be in proper metropolitan areas like Chicago unless it is in rough areas.  If you go 40-60 miles away from major cities you can almost always find some decent cash-flowing properties.  

    But as inflation and home values continue to rise the 1% rule slowly becomes less likely....before you used to find 2% deals and now those are few and far between.

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  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    4y

    @Michele Velazquez I do still use the 1% rule. On really good deals I can occasionally get 1.5% if I find a screaming deal. To be fair, these are still value add, so this isn't stabilized fully, and I have to force the property to perform through good operations. 

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    4y

    Sometimes, sort of but not completely but sort of a little bit...

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  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    4y

    The 1% rule is meaningless in my opinion, especially when comparing markets like you are doing. Just ask yourself whether it tells you anything about the ROI. It's a top line number that says nothing about returns. It's not useful at all for comparing different markets. A 1% ratio in Houston or Austin will not produce the same kind of returns as a 1% ratio in say Cincinnati or Atlanta. That's because TX has high property taxes and also insurance rates while GA and OH have relatively low property taxes. The 1% rule does not account for differences in operating costs in different markets which can vary drastically. It might be ok to do a quick "napkin" calculation but other than that, I don't find it useful. Ask yourself which is the better investment--the deal that has a 1% ratio and produces $100/mth in cash flow or the deal with a .8% ratio that produces $200/mth. The only measurement that has any true meaning is the total income and equity or IRR over several years. If you're only looking at things like short term cash on cash you're missing the big picture.

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