Here’s another rookie question…the 1% rule…
Does the 1% rule get calculated from a home’s pre-rehab price or should it be 1% of the total (purchase price + rehab costs)?
Ex. 1. I buy a house for $60k. Rent would be $800. That works.
Ex. 2. I buy a house for $75k that needs $20k in rehab. Rent would be $800. That doesn’t.
Most Popular Reply
@Mike Montanye It would be your all-in cost, but don't make decisions off of the 1% rule (You didn't say that you are, but I think it's good to put it out there for anyone that might be). It is quick and can be helpful to gauge if something "might" be profitable, but there are so many differences in locations that I don't think it is particularly helpful if you're looking at multiple markets. A 1% deal in New York, Florida, or Tennessee will all have very different levels of profitability due to property tax levels, insurance costs, business/investment license and tax structures, etc. Even within the same local market, two different properties that meet the same initial cost and rental income rate and are therefore surface level identical "1% rules" will have different system ages and ongoing repair costs and/or upcoming capex items. Those are likely going to be harder to figure out at your initial pass, but will still impact your personal investment returns. Using your two examples, it may be that property 2 is way more profitable on an ongoing basis than property 1 after spending $20k replacing major systems.
TLDR - Don't think that paying a price at a ".9%" level is a necessarily a failure to be avoided (it might be, but that's why you need to actually run numbers).