Understanding the 1% rule

7 Replies

I have read posts and listened to the podcasts and they discuss the 1% rule which I understand is a rule of thumb. I see this small duplex (1 bed/1 bath each side) listed for 70k. It is rented out right now at $450 per side for $900 a month. That is above the 1% rule so it looks like a good deal until I run the numbers. Expenses come out to $950/month with is -$50 cash flow. I believe the rents could be raised to $600 which would put me at $160/month cash flow. That sounds better, but I am unsure on the rents. A property manager in my area said it could support $600 a month. I am not so sure, but then again I am still new at this. Help me better understand the 1% rule. Do I just look at rents and purchase price and if it's 1% that just tells me to analyze further? Do I just use it as a criteria to look closer or skip it?

Property tax: $1227

Loan info: 6%, 20 year am, 15% down - $400/month

Vacancy 5%: $45

Repairs 5%: $45

CapEx 8%: $72

Mgmt Fees 10%: $90

Insurance: $200

The 1% rule is a rule of thumb, like you said, which means that it will not apply in all situations. Typically, if it meets the 1% rule, then it warrants a deeper look. Is there a reason you are looking at a 20 year mortgage? If you were able to get a 30 year then you would have a lower monthly payment which could give you better cash flow. However, some of your other percentages seem to be a little lower than most people calculate. The standard calculations are usually 7% - vacancy, 10% - repairs, 10% CapEx, 10% - still for management. That might kill your deal.

I was working with a local bank and they were offering a 20 year am with 15% down. That's why I was looking at 20 years. I know my percentages are lower than the standard, and that may be a mistake on my part. It may be just that I need to look for better deals.

$200 a month for insurance on a $70k property is really high. That number is killing the cash flow more than anything else. You sure that’s correct?

Originally posted by @Kyle J. :

$200 a month for insurance on a $70k property is really high. That number is killing the cash flow more than anything else. You sure that’s correct?

 I agree. $200 a month seems super high.. that's $2400 a year. The average annual premium is typically $900-$1000. If you got a couple more quotes, it might really increase your cash flow. 

The 1% rule is a crude rule of thumb. I use it more to screen out deals rather than to find good deals.  I no way would I conside 1% rule good enouh to make a buying decision on.  

Personally I want to be more like 1.5%-3%. I am very fortunate to be in a market where I can do that.

@Ned Carey , in CA, the 1% rule isn't possible, much less 1-3%.   The closer I get to 1%, the worse the areas are.   But, I do not want to invest out of state where I can't travel to see the property nor do I have a team or boots anywhere that justifies buying out of State. I've looked up and down my entire state and even if I focus on lease optios or subject to's, the cash flow has to be there for me. What is your thought on this?

@Joe Yobaccio There are poor people in CA. They have to live somewhere. The 1% rule is a very crude rule. They key is to get properties that have at least some cash flow. They may b hard to find but I am sure there are cash flowing deals out there.  Al alternative is to put  more down to reduce your mortgage so it cash flows.