How Important is the 1% rule?

[Trevor Bogus]

Greetings from Southwest Colorado,

I am new to real estate and fairly new to this website, but the idea of investing in real estate ignites a passion in me. I have read a few books so far (Rich Dad Poor Dad, Set for Life, The Househacking Strategy, and a couple others) as well as tons of blogs and posts on here.

I want to start househacking and in a year turn it into a rental. However, in my area (as I'm sure tons of other areas), properties that meet the one percent rule don't seem to exist. I met with a lender and got pre-qualifed, but it's a high monthly payment due to down payment assistance and CHFA assistance. I plan on meeting with another lender this week, just to get a second opinion.

I have only looked at the MLS for deals, but in my area it doesn't look promising for the 1 percent rule. I guess my question/questions would be:

If a property doesn't meet the 1% rule do you immediately dismiss it? What ways have you been creative to make the 1% rule work? (Like Craig sleeping in the living room to rent out his room.) 

Any ideas or personal experiences would be greatly appreciated, or book suggestions too!

Thank you for sharing your knowledge!

[Steve K.]

@Trevor Bogus I have some properties that met the 1% rule on purchase and others that didn't. The best overall returns I have seen came from a property that was about .5% on purchase, whereas those that met the 1% "rule" have performed worse overall from a cash on cash or IRR basis. This is due to the .5% property being in a great area, where rents have been increasing steadily, appreciation is high, and turnover is low. The 1% properties have had slower rent growth, higher turnover and eviction rate (major profit killer), and less appreciation. So in my opinion the 1% rule is overly simplistic. Instead I like to pay attention to all the ways owning property can generate returns, including positive monthly cash flow but also including depreciation tax benefits, principle pay down, and appreciation. To me location, physical condition, tenant quality, a high demand rental market, high chance of rents increasing and appreciation are more important than how it looks according to the 1% rule. These features tell me more about the overall quality and value of a property than the price to rent ratio.