Small Multifamily and the 1% Rule

5 Replies

I joined a webcast last night hosted by Brandon Turner. Awesome information and definitely gave me a good grounding into what I should be looking for when it comes to small multifamily properties. He says he looks for 2 main factors when analyzing a deal:

1) cash flow of $200 per unit per month

2) cash-on-cash return of 12%

He didn't mention anything about the 1% rule, and that surprised me a bit. Any thoughts on that from others who are currently investing in the space?

The 1% rule isn't particularly nuanced, and is a bit dated depending on your market. If you went around looking for 1% rule deals these days, you wouldn't be doing many deals. The 1% rule was always just a high-level go/no-go indicator anyway.

$200/mo cash flow and 12% cash on cash return require you to do a bit more work in terms of evaluating properties, but such an analysis is a more accurate assessment of how you'll operate the property.

Everybody does things a little bit differently.  I personally don't abide by the 1% rule.  If it cash flows 250 or more a month and the calculations work it's a win in my book.  Usually I find these properties need more repairs than I am comfortable doing so I pass on most of them.

@Steven Gould

I agree with @David Abbate; the 1% rule is just a preliminary indicator if the rent vs the price is in the ball park. Does not include any other expenses, debt service, management fees etc.