Mortgage Rates Eating into Cash Flow Under 1% Rule

Member since 2019 · 2 posts · 3 votes

Hi all,

I've been trying to find updates of the 1% rule and whether it's working in 2024, specifically when you're using a mortgage at 80% LTV, 30-year mortgage. Looking at rates today, if I were to buy a property for $125k and have a $100k mortgage, the rate would be 6.25%, and with a 30-year mortgage, that's $7.5k of annual mortgage payment. Annual rent with the 1% rule is $12.5k. This means that mortgage payments eat up 60% of rent even before considering vacancy. This means the 50% rule fails now (50% + 60% = 110% --- 10% more in costs than rent), and other cost estimate methodologies seem to yield negative net cash flow.

Am I thinking about this correctly? Has anyone who has historically used the 1% rule modified it to accommodate current interest rates?

Thanks,
Ted

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

@Ted Barrett

your analysis is roughly correct. higher rates have crushed cash flow.

i never really used the rule to begin with. i just looked at lots of individual properties. i will also do a BRRRR if i can break even when i'm done and get 90+% of my cash back out.

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Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
2y
@Ted Barrett
your analysis is roughly correct. higher rates have crushed cash flow.
i never really used the rule to begin with. i just looked at lots of individual properties. i will also do a BRRRR if i can break even when i'm done and get 90+% of my cash back out.
7 Reply
Bradley BuxtonBusiness Member
Real Estate Agent · NV · Member since 2023 · 1k+ posts · 713 votes
2y
@Ted Barrett
It's not really a rule but a napkin math theory to estimate if an investment is "good" from the twenty teens. The strategies of the last 10-12 years are not working as well (if at all) as they did 4 years ago. We are in a new era of higher interest rates, gurus selling information, and low supply in popular markets. Adjusting for the current conditions will be important to reach your goals. A larger down payment is required to cash flow in many markets. There might be flip opportunities, multifamily, house hacking etc... Work with what you can control and let go of arbitrary rules.
6 Reply
Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
2y
The 1% rule is a flawed underwriting technique. Expenses (both transactionally as well as operationally) disproportionately impact lower priced assets. That has always been the case and is not tied to the current interest rate environment. Take for instance my B+ located quadraplex consisting of 2 Bedroom units in Philadelphia that rent for just shy of $3,000/m and compare my building to the nearly identical quadraplex building in a C location in Philadelphia were the rents are $1,200/m. My water usage bill is the same, general lability coverage is the same, if and when I have to replace my water service line it will cost the same, the cost for my lawncare and snow removal costs the same, exterminating services cost the same and the list goes on. The same will hold true in any market you examine I am just using my own market to drive home this point. Interest rates just happen to be an additional obstacle many face who are focused solely on cash flow.
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6 Reply
Jonathan GreeneBusiness Member
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
2y
@Bradley Buxton nailed it - the one percent rule is just quick napkin math (great term by the way). It's nothing more than that. You want to learn to become an asset hunter and not a spreadsheet warrior. Asset hunters find unique assets and things others can't see (extra land for an ADU, extra room for another full bath, etc.). Spreadsheet warriors wonder why nothing is "penciling" in this environment and it's usually because they aren't looking in person. You use your spreadsheet after you see it to crunch. If you always use a spreadsheet before you look, you will get no reps.
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Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
2y
@Jonathan Greene
asset hunter - yes. quick - trademark it!
as i mentioned for example, a BRRRR in a great neighborhood that I can break even on after it's rehabbed. i will buy an unlimited number of those. the return is a tenant buying me a paid off asset. i just have to be really, really patient.
i will say though that i am actually heartened when a new investor does some math and figures out, correctly, that a miscellaneous deal with conventional debt will NOT cash flow. this is better than using rosy projections of $10.50 a month for capex and 6% rent increases every year until 3100, and pretending there is no such thing as closing costs or rent ready costs.
4 Reply
John MorganPro Member
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
2y
It all depends. I haven't found the 1% rule in my area for the last couple years. I can survive off less than that. I look at what my cash on cash (CoC) is with my downpayment, closing costs and make ready/rehab. I'd like to at least make 6-10% off my money with 20% down on a 30 year loan if I see potential in the area. I also have some in a lower income area that I get the 2% rule. However, these don't have appreciation and will require the same cap ex over time. So I have a balance of both. I've got 20 that cash flow well and 9 that aren't cash cows, but appreciate well only making around $300-$600/month.
0 Reply
Tim Ryan
Investor / Mentor / Contractor · Arcadia, CA Buying Out of State · Member since 2015 · 654 posts · 622 votes
2y
No way. You can't compromise. I remember being a beginner and having similar thoughts and my coach telling me "you need to keep looking for the deal, it's out there". Guess what? It was. But I had to find a new market and it was thousands of miles away from my house. Keep at it I say, but modify your search, not your financial minimums.
2 Reply
Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
2y
Cashflow died after covid with all those old rules. Just do value adds, get rents up and they will cashflow higher over time. Add in cash out refi if want be more aggressive.
The gurus are full of bs. Even out of state markets when factor in managers/real expenses cashflow is not there.
4 Reply
Becca F.
Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
2y
Quote from @Nicholas L.:
i will say though that i am actually heartened when a new investor does some math and figures out, correctly, that a miscellaneous deal with conventional debt will NOT cash flow. this is better than using rosy projections of $10.50 a month for capex and 6% rent increases every year until 3100, and pretending there is no such thing as closing costs or rent ready costs.
100% agree. When someone tells me that "you won't have repairs or cap ex for a while since the seller just renovated it"... well that property is -$300 to $-500 a month from repairs called in by the tenant most months. And the stolen AC unit. This was a 0.88% rule (close to 1% rule = I really dislike that guideline now). As an aside, a contractor told me that a property can pass an inspection but once someone is living there and putting daily stress on the house, things can start to malfunction. I hope this house is finally stabilizing after owning it for over 18 months, no repairs called in for 2 months so far.

To the OP, if you're considering buying out of state (not sure where you're located), there are risks with OOS investing if you're looking for a lower priced market. You're not on site or within driving distance and even with a property manager, lots of things can happen. I can give numerous examples of California investors I know losing money from buying in "cheaper cash flow on paper markets."
3 Reply
Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
2y
@Ted Barrett
We use the 1% for larger multifamily. We try to buy around the 1% and when it's repositioned, we achieve above the 1%. You may have to put down more than 20%, or lower the purchase price.
If a deal works with these rates, it's gonna be a homerun when rates comes down and you can refi.
Gino
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Ko KashiwagiPro Member
Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
2y
Hi Ted,
Yes, it's definitely a tougher market. I've personally am making more aggressive offers to make the numbers work and focusing appreciation.
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1 Reply
Alecia LovelessPro Member
Member since 2019 · 3k+ posts · 2k+ votes
2y
@Ted Barrett I look at a lot of deals that essentially make good on the 1% rule. This definitely does not mean there’s cash flow. On most deals I see today there’s not cash flow.
I just closed on a 6 unit deal that’s at about 1.2% and once I get it stabilized it will be around 1.6%. After I managed to creatively finance it, this deal isn’t going to cash flow at all for the first 3 years until the 3rd note drops off, and after 5 years when the 2nd note drops off it will cash flow at least $250/unit/month.
To get this solid off market deal I was willing to wait 5 years to get a good return.
Investing is a long term strategy for me, not so much a short term play.
1 Reply
Michelle Fenn
Real Estate Agent · Cleveland OH · Member since 2015 · 213 posts · 275 votes
2y
I am in Ohio, where we can still cash flow. I use the 1% rule as only a pencil calculation. If the sales price is so high, you can not even obtain at least 1% with a Zillow rent estimate keep looking. Saves me a lot a time running ROI calculations of every low priced property the shows up on the MLS.
1 Reply
Mike H.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
2y
The 1% rule doesn't work everywhere anyway. Perfect example is Illinois where our taxes are 2 or 3 times most other areas. In my area, a 200k house would have property taxes of roughly 6400/yr. Whereas the same 200k house in tennessee would have property taxes of than 1k a year. Thats a huge swing in expenses.

I think you have to run the numbers and work backwards and then find a gross profit that you're comfortable with. I.e 3bed, 1500 sq ft house rents for 2k/mo. You can buy it for 200. Your down payment would be 50k, and loan 150k. Your payment at 6.5% would be 950/mo or so. Taxes another 400/mo. Insurance 100/mo. That leaves 550/mo gross profit.

If you're ok with that number, then you do it. If not, then you pass. Just need to find a gross profit number that you're ok with and go from there.
1 Reply
Alan AsriantsBusiness Member
Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
2y
Quote from @Nicholas L.:

@Ted Barrett
your analysis is roughly correct. higher rates have crushed cash flow.
i never really used the rule to begin with. i just looked at lots of individual properties. i will also do a BRRRR if i can break even when i'm done and get 90+% of my cash back out.

Seeing a lot of this. People doing BRRRRs getting back a good portion of their investment and breaking even.
Doing one of these myself. Thats considered a good deal in a nice area...
[email protected]267-767-0111
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0 Reply
Alan AsriantsBusiness Member
Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
2y
Quote from @Becca F.:

Quote from @Nicholas L.:
i will say though that i am actually heartened when a new investor does some math and figures out, correctly, that a miscellaneous deal with conventional debt will NOT cash flow. this is better than using rosy projections of $10.50 a month for capex and 6% rent increases every year until 3100, and pretending there is no such thing as closing costs or rent ready costs.
100% agree. When someone tells me that "you won't have repairs or cap ex for a while since the seller just renovated it"... well that property is -$300 to $-500 a month from repairs called in by the tenant most months. And the stolen AC unit. This was a 0.88% rule (close to 1% rule = I really dislike that guideline now). As an aside, a contractor told me that a property can pass an inspection but once someone is living there and putting daily stress on the house, things can start to malfunction. I hope this house is finally stabilizing after owning it for over 18 months, no repairs called in for 2 months so far.

To the OP, if you're considering buying out of state (not sure where you're located), there are risks with OOS investing if you're looking for a lower priced market. You're not on site or within driving distance and even with a property manager, lots of things can happen. I can give numerous examples of California investors I know losing money from buying in "cheaper cash flow on paper markets."

Its easier to trust a Guru who preaches great returns than to buy something that doesn't have as good returns in your backyard.
many people will follow where they are told the easiest way to make money is its human nature. In fact most will even convince themselves that what is out there is better than what they have.
Not to knock on any Out of state investing, I know that it can be very lucrative. But most of those investors know those areas well and been there. You just made a good point that many people are in over their head. This goes to Section 8 gurus, C-D class BRRRR gurus. I've seen them all
On paper its fantastic, in practice not so much, but at that point it is too late...
[email protected]267-767-0111
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0 Reply
Mike H.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
2y
Quote from @Alan Asriants:

Quote from @Nicholas L.:

@Ted Barrett
your analysis is roughly correct. higher rates have crushed cash flow.
i never really used the rule to begin with. i just looked at lots of individual properties. i will also do a BRRRR if i can break even when i'm done and get 90+% of my cash back out.

Seeing a lot of this. People doing BRRRRs getting back a good portion of their investment and breaking even.
Doing one of these myself. Thats considered a good deal in a nice area...
I think if you're looking to build a sizable portfolio, then these break even deals can be ok if they're in good areas with good rents. And I did a few of these when I was building my portfolio. But I think the key is that you have to a balance of higher cash flow properties so that you don't end up with 40 of these deals that break even and nothing else. Then you'pre going to get yourself into trouble.

But every once in a while there was just a really nice house that I knew would be a great long term investment and I would break my normal numbers requirements and take it down. And those deals turned out to be huge equity gains 10 years later for sure.

The other trick I would do is I would fudge my numbers on the rehab to make the numbers work so I could stay under the 70% ltv and not put in too much money on deal. And what I mean by that is that I would take a house that needed 30k in rehab and cut the rehab budget down to 20k and leave the old windows. Leave the ugly cabinets (or just paint them), leave a roof thats on its last leg and maybe has 4 or 5 years tops with repairs if that.

My goal was to take down houses and by doing that, I was able to grow faster and offer more so I could get more. And then I was able to do the deferred maintenance later on after tenants had paid the rent for a few years.

The appreciation and principal paydown gained over the years was well worth the shell game I played by under rehabbing the houses for rent to keep under that 70% ltv mark and still offering enough to take them down.

2 Reply
Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
2y
@Mike H. really thoughtful post and I totally agree. a break even BRRRR is definitely not something a brand new investor who isn't well capitalized should try. thanks for adding that.
0 Reply
Michael SmytheBusiness Member
Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
1y
@Ted Barrett why would you pay what the seller is asking, instead of offering an amount that leads to meeting your numbers?
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Ted Barrett
OP
Member since 2019 · 2 posts · 3 votes
1y
Thanks, all. Trying to encapsulate all the replies here, and I appreciate the thoughtfulness. I'm not looking to compromise on the analysis; rather I just am still seeing "2024" articles coming up about the 1% rule being a good rule of thumb and wanted to make sure I wasn't missing anything obvious. Seems like I'll need to use a higher figure as my rule of thumb "i.e., 1.2%" and adjust based on big ticket items like property tax. Conversely, if I'm only seeing properties fail the 1% rule in a given area, it's probably a good signal to look elsewhere unless a particularly good deal pops up. It also seems like I'll need to do value-additive work (i.e., BRRRR) in most areas to make things work (and ultimately to get the best return); my hope was to find some more "turn key" properties to get my feet wet, but I'll see what's out there and maybe start with a more manageable rehab / lower price point to mitigate the risk of botching the work.
0 Reply
Tanya Maslach
Member since 2024 · 130 posts · 95 votes
1y
Quote from @Jonathan Greene:

@Bradley Buxton nailed it - the one percent rule is just quick napkin math (great term by the way). It's nothing more than that. You want to learn to become an asset hunter and not a spreadsheet warrior. Asset hunters find unique assets and things others can't see (extra land for an ADU, extra room for another full bath, etc.). Spreadsheet warriors wonder why nothing is "penciling" in this environment and it's usually because they aren't looking in person. You use your spreadsheet after you see it to crunch. If you always use a spreadsheet before you look, you will get no reps.

Thank you SO much for this ! I'm trying to move from SFH long term rental (one-off's) to building an actual portfolio focused in multifamily and growing from there.
I can feel myself getting buried in spreadsheet-mania and the BP deal analyzer tools -- and is a soul-crusher.
Scheduled a visit to see my first property next week just to get-out-and-do-it already.
My biggest hurdles now are: finding and trusting the right agent (Denver), and lender. (Suggestions welcome -- I ran through BP's recommendations without anything working out)
2 Reply
Jonathan GreeneBusiness Member
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
1y
Quote from @Tanya Maslach:

Quote from @Jonathan Greene:

@Bradley Buxton nailed it - the one percent rule is just quick napkin math (great term by the way). It's nothing more than that. You want to learn to become an asset hunter and not a spreadsheet warrior. Asset hunters find unique assets and things others can't see (extra land for an ADU, extra room for another full bath, etc.). Spreadsheet warriors wonder why nothing is "penciling" in this environment and it's usually because they aren't looking in person. You use your spreadsheet after you see it to crunch. If you always use a spreadsheet before you look, you will get no reps.

Thank you SO much for this ! I'm trying to move from SFH long term rental (one-off's) to building an actual portfolio focused in multifamily and growing from there.
I can feel myself getting buried in spreadsheet-mania and the BP deal analyzer tools -- and is a soul-crusher.
Scheduled a visit to see my first property next week just to get-out-and-do-it already.
My biggest hurdles now are: finding and trusting the right agent (Denver), and lender. (Suggestions welcome -- I ran through BP's recommendations without anything working out)

Denver is a hotbed so it is a challenge. I have several very trusted agents in the area, just DM me. They work with investors primarily. You are doing the right thing to help you by getting out from behind the analyzing and just tell yourself to see 5 in a week and run numbers on the best one instead of running numbers of 5 and seeing none.
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1 Reply
Michelle Fenn
Real Estate Agent · Cleveland OH · Member since 2015 · 213 posts · 275 votes
1y
MIchael Symthe : That would be my response also. Even if I do not make an offer, I will provide feedback on how below market rents or unrealistic rents decrease the value of an investment property. I have seen sellers try to sell homes with 10 year leases at below market rent.
0 Reply
Eric Hughes
Investor · Member since 2020 · 5 posts · 6 votes
1y
Quote from @Alan Asriants:

Quote from @Becca F.:

Quote from @Nicholas L.:
i will say though that i am actually heartened when a new investor does some math and figures out, correctly, that a miscellaneous deal with conventional debt will NOT cash flow. this is better than using rosy projections of $10.50 a month for capex and 6% rent increases every year until 3100, and pretending there is no such thing as closing costs or rent ready costs.
100% agree. When someone tells me that "you won't have repairs or cap ex for a while since the seller just renovated it"... well that property is -$300 to $-500 a month from repairs called in by the tenant most months. And the stolen AC unit. This was a 0.88% rule (close to 1% rule = I really dislike that guideline now). As an aside, a contractor told me that a property can pass an inspection but once someone is living there and putting daily stress on the house, things can start to malfunction. I hope this house is finally stabilizing after owning it for over 18 months, no repairs called in for 2 months so far.

To the OP, if you're considering buying out of state (not sure where you're located), there are risks with OOS investing if you're looking for a lower priced market. You're not on site or within driving distance and even with a property manager, lots of things can happen. I can give numerous examples of California investors I know losing money from buying in "cheaper cash flow on paper markets."

Its easier to trust a Guru who preaches great returns than to buy something that doesn't have as good returns in your backyard.
many people will follow where they are told the easiest way to make money is its human nature. In fact most will even convince themselves that what is out there is better than what they have.
Not to knock on any Out of state investing, I know that it can be very lucrative. But most of those investors know those areas well and been there. You just made a good point that many people are in over their head. This goes to Section 8 gurus, C-D class BRRRR gurus. I've seen them all
On paper its fantastic, in practice not so much, but at that point it is too late...

All reasonable points -- but out-of-state investing for cash flow can certainly work. You need a good PM, and the right property strategy, but the cash flow is there (whereas you just can't get it in HCOL markets.) I have 25 properties in Memphis, and they cash flow $80-$100K per year, or $50K-$70K after CapEx.
But that's with a conservative strategy, not the Section 8/BRRRR gurus path -- totally agree there are some scam artists out there.
2 Reply
Mohammed Rahman
Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes
1y
@Ted Barrett You're thinking about this exactly right, and yeah, the 1% rule has definitely been getting squeezed in 2024 with mortgage rates like 6.25%.

That rule was always more of a quick filter than a hard guide, and with today’s interest rates, it’s clear that the math just doesn’t hold up like it used to.

A lot of investors are tweaking their approach—some are looking for higher rent-to-price ratios or shifting to more creative financing options like seller financing or adjustable-rate mortgages to help with cash flow.

It might also be worth exploring markets where properties cash flow better under current conditions, even if it means adjusting your investment criteria.
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