A couple of rookie questions

New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote

Hello everyone. I am just starting to dive into real estate investing and still have a lot to learn before I either buy my first rental property or move and rent my current home. There is one thing that confuses me that I just can’t seem to find an answer on anywhere, at that is the importance of the 1% rule.

When looking on Zillow, every house I find, the rental estimate is less than 1% of home value. I also looked on roofstock, and with all the information that they put in for rental and expense estimates, etc, they all show negative cash flow. Even in my current house/neighborhood, I couldn’t imagine people being willing to pay 1% of what homes are currently selling for. Am I just out of touch with what people are willing to pay in rent, or is there something else I am missing?

I know you can factor depreciation into taxes, but am I correct in thinking that shouldn’t be factored into cash flow calculations?

Hope these questions don’t sound too dumb. Just trying to make sense of things as I continue to read and learn. Thanks in advance for the help.

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Kevin Hart

Real Estate Agent · Louisville, KY · Member since 2014 · 257 posts · 172 votes

@Kevin Jennings Its hard to find deals that meet the 1% rule on market, even in my market of Louisville, KY which tends to be pretty affordable. Have you considered the BRRRR method? That is how I get my rentals. It builds in equity and helps me exceed the 1% rule every time. Also, get connected with your local wholesalers and other investors. You'll find much better deals off-market. Also, play around with the BiggerPockets calculator if you haven't already. It will help you get more comfortable with what is a deal and what is not.

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Taylor L.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
4y
Depreciation is not factored into cash flow calculations, you are correct.
It's going to be tough to find a true 1% deal on the market, and it has been for a few years. The key is going off market! Get in touch with your local real estate investor networking groups and start gaining access to off market deals.
4 Reply
Kevin Jennings
OP
New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote
4y
Originally posted by @Taylor L.:
Depreciation is not factored into cash flow calculations, you are correct.
It's going to be tough to find a true 1% deal on the market, and it has been for a few years. The key is going off market! Get in touch with your local real estate investor networking groups and start gaining access to off market deals.

Ok I’ll look into that. Thank you!

1 Reply
Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
4y
The 1% rule doesn't always work. Run the actual numbers and go from there. There are many 'rules' people use and they don't always work.
3 Reply
Jason G.Pro Member
Rental Property Investor · Long Island, NY · Member since 2015 · 434 posts · 495 votes
4y
Originally posted by @Kevin Jennings:
Hello everyone. I am just starting to dive into real estate investing and still have a lot to learn before I either buy my first rental property or move and rent my current home. There is one thing that confuses me that I just can’t seem to find an answer on anywhere, at that is the importance of the 1% rule.

When looking on Zillow, every house I find, the rental estimate is less than 1% of home value. I also looked on roofstock, and with all the information that they put in for rental and expense estimates, etc, they all show negative cash flow. Even in my current house/neighborhood, I couldn’t imagine people being willing to pay 1% of what homes are currently selling for. Am I just out of touch with what people are willing to pay in rent, or is there something else I am missing?

I know you can factor depreciation into taxes, but am I correct in thinking that shouldn’t be factored into cash flow calculations?

Hope these questions don’t sound too dumb. Just trying to make sense of things as I continue to read and learn. Thanks in advance for the help.

After the subprime mortgage crisis the cost for properties dropped significantly and had taken some time to recover. During that time the "1% rule" was a viable strategy. However, in many markets the cost for properties have risen to the level where the numbers just do not work if you are picking them up at market value. For all my properties in the Atlanta Market, the values of properties have gone up significantly since I started purchasing them several years ago and while they were good investments to buy when I did, they would be horrible investments to buy now at their current values. As others have said, you can find potential deals with off market properties or those that need renovations. Always use your own numbers. You should be able to figure out the PITI on your own, what the fees are for the local PM companies, and also check what the local rents are for properties currently looking for tenants. Don't rely on Zillow or Roofstock or any other website, but definitely use those types of websites as a tool.

2 Reply
Kevin Jennings
OP
New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote
4y
Originally posted by @Jason G.:
Originally posted by @Kevin Jennings:
Hello everyone. I am just starting to dive into real estate investing and still have a lot to learn before I either buy my first rental property or move and rent my current home. There is one thing that confuses me that I just can’t seem to find an answer on anywhere, at that is the importance of the 1% rule.

When looking on Zillow, every house I find, the rental estimate is less than 1% of home value. I also looked on roofstock, and with all the information that they put in for rental and expense estimates, etc, they all show negative cash flow. Even in my current house/neighborhood, I couldn’t imagine people being willing to pay 1% of what homes are currently selling for. Am I just out of touch with what people are willing to pay in rent, or is there something else I am missing?

I know you can factor depreciation into taxes, but am I correct in thinking that shouldn’t be factored into cash flow calculations?

Hope these questions don’t sound too dumb. Just trying to make sense of things as I continue to read and learn. Thanks in advance for the help.

After the subprime mortgage crisis the cost for properties dropped significantly and had taken some time to recover. During that time the "1% rule" was a viable strategy. However, in many markets the cost for properties have risen to the level where the numbers just do not work if you are picking them up at market value. For all my properties in the Atlanta Market, the values of properties have gone up significantly since I started purchasing them several years ago and while they were good investments to buy when I did, they would be horrible investments to buy now at their current values. As others have said, you can find potential deals with off market properties or those that need renovations. Always use your own numbers. You should be able to figure out the PITI on your own, what the fees are for the local PM companies, and also check what the local rents are for properties currently looking for tenants. Don't rely on Zillow or Roofstock or any other website, but definitely use those types of websites as a tool.

Good to know. Do you think right now is just an overall bad time to get into real estate?

0 Reply
Jason G.Pro Member
Rental Property Investor · Long Island, NY · Member since 2015 · 434 posts · 495 votes
4y
Originally posted by @Kevin Jennings:
Originally posted by @Jason G.:
Originally posted by @Kevin Jennings:
Hello everyone. I am just starting to dive into real estate investing and still have a lot to learn before I either buy my first rental property or move and rent my current home. There is one thing that confuses me that I just can’t seem to find an answer on anywhere, at that is the importance of the 1% rule.

When looking on Zillow, every house I find, the rental estimate is less than 1% of home value. I also looked on roofstock, and with all the information that they put in for rental and expense estimates, etc, they all show negative cash flow. Even in my current house/neighborhood, I couldn’t imagine people being willing to pay 1% of what homes are currently selling for. Am I just out of touch with what people are willing to pay in rent, or is there something else I am missing?

I know you can factor depreciation into taxes, but am I correct in thinking that shouldn’t be factored into cash flow calculations?

Hope these questions don’t sound too dumb. Just trying to make sense of things as I continue to read and learn. Thanks in advance for the help.

After the subprime mortgage crisis the cost for properties dropped significantly and had taken some time to recover. During that time the "1% rule" was a viable strategy. However, in many markets the cost for properties have risen to the level where the numbers just do not work if you are picking them up at market value. For all my properties in the Atlanta Market, the values of properties have gone up significantly since I started purchasing them several years ago and while they were good investments to buy when I did, they would be horrible investments to buy now at their current values. As others have said, you can find potential deals with off market properties or those that need renovations. Always use your own numbers. You should be able to figure out the PITI on your own, what the fees are for the local PM companies, and also check what the local rents are for properties currently looking for tenants. Don't rely on Zillow or Roofstock or any other website, but definitely use those types of websites as a tool.

Good to know. Do you think right now is just an overall bad time to get into real estate?

No. There are plenty of people that do not purchase investment properties or stocks because they are trying to time the markets and end up losing out a lot of potential gains over the course of their lifetime. We may never see another housing crash or a significant drop in prices in the housing market in our lifetimes. Traditionally over time prices go up. It is just a matter of working on finding deals. If this was easy then everyone would do it.

1 Reply
Phong Tran
Real Estate Broker · Portland, OR · Member since 2019 · 22 posts · 26 votes
4y
Hey there! Like what most of everyone stated here, the 1% doesn't work and will not always work for every market out there. It's a general rule of thumb so you can quickly weed out the back properties from the possibilities. Obviously, over the years this specific rule of thumb has become unreliable due to the constant rising of home prices. Always, always, always..! dive deeper, crunch the real numbers to see what the true financials are.

I.E - I'm in the Portland, OR market and the 1% is non-existent here! If I were to always follow that specific metric, I would still be trying to chase my first investment.

Good luck! @Kevin Jennings
2 Reply
Kevin Jennings
OP
New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote
4y
Originally posted by @Jason G.:
Originally posted by @Kevin Jennings:
Originally posted by @Jason G.:
Originally posted by @Kevin Jennings:
Hello everyone. I am just starting to dive into real estate investing and still have a lot to learn before I either buy my first rental property or move and rent my current home. There is one thing that confuses me that I just can’t seem to find an answer on anywhere, at that is the importance of the 1% rule.

When looking on Zillow, every house I find, the rental estimate is less than 1% of home value. I also looked on roofstock, and with all the information that they put in for rental and expense estimates, etc, they all show negative cash flow. Even in my current house/neighborhood, I couldn’t imagine people being willing to pay 1% of what homes are currently selling for. Am I just out of touch with what people are willing to pay in rent, or is there something else I am missing?

I know you can factor depreciation into taxes, but am I correct in thinking that shouldn’t be factored into cash flow calculations?

Hope these questions don’t sound too dumb. Just trying to make sense of things as I continue to read and learn. Thanks in advance for the help.

After the subprime mortgage crisis the cost for properties dropped significantly and had taken some time to recover. During that time the "1% rule" was a viable strategy. However, in many markets the cost for properties have risen to the level where the numbers just do not work if you are picking them up at market value. For all my properties in the Atlanta Market, the values of properties have gone up significantly since I started purchasing them several years ago and while they were good investments to buy when I did, they would be horrible investments to buy now at their current values. As others have said, you can find potential deals with off market properties or those that need renovations. Always use your own numbers. You should be able to figure out the PITI on your own, what the fees are for the local PM companies, and also check what the local rents are for properties currently looking for tenants. Don't rely on Zillow or Roofstock or any other website, but definitely use those types of websites as a tool.

Good to know. Do you think right now is just an overall bad time to get into real estate?

No. There are plenty of people that do not purchase investment properties or stocks because they are trying to time the markets and end up losing out a lot of potential gains over the course of their lifetime. We may never see another housing crash or a significant drop in prices in the housing market in our lifetimes. Traditionally over time prices go up. It is just a matter of working on finding deals. If this was easy then everyone would do it.

Awesome. thank you very much!

0 Reply
Kevin Jennings
OP
New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote
4y
Originally posted by @Phong Tran:
Hey there! Like what most of everyone stated here, the 1% doesn't work and will not always work for every market out there. It's a general rule of thumb so you can quickly weed out the back properties from the possibilities. Obviously, over the years this specific rule of thumb has become unreliable due to the constant rising of home prices. Always, always, always..! dive deeper, crunch the real numbers to see what the true financials are.

I.E - I'm in the Portland, OR market and the 1% is non-existent here! If I were to always follow that specific metric, I would still be trying to chase my first investment.

Good luck! @Kevin Jennings

Thank you! I’m in Texas so I also have high property tax rates that cut into profits. If you can’t make the 1% work what do you use to determine if a property is a good investment? Do you just settle for less cash flow or is there something else you go by?

0 Reply
Kevin Hart
Real Estate Agent · Louisville, KY · Member since 2014 · 257 posts · 172 votes
4y
@Kevin Jennings Its hard to find deals that meet the 1% rule on market, even in my market of Louisville, KY which tends to be pretty affordable. Have you considered the BRRRR method? That is how I get my rentals. It builds in equity and helps me exceed the 1% rule every time. Also, get connected with your local wholesalers and other investors. You'll find much better deals off-market. Also, play around with the BiggerPockets calculator if you haven't already. It will help you get more comfortable with what is a deal and what is not.
5 Reply
Jason G.Pro Member
Rental Property Investor · Long Island, NY · Member since 2015 · 434 posts · 495 votes
4y
Originally posted by @Kevin Jennings:
Originally posted by @Phong Tran:
Hey there! Like what most of everyone stated here, the 1% doesn't work and will not always work for every market out there. It's a general rule of thumb so you can quickly weed out the back properties from the possibilities. Obviously, over the years this specific rule of thumb has become unreliable due to the constant rising of home prices. Always, always, always..! dive deeper, crunch the real numbers to see what the true financials are.

I.E - I'm in the Portland, OR market and the 1% is non-existent here! If I were to always follow that specific metric, I would still be trying to chase my first investment.

Good luck! @Kevin Jennings

Thank you! I’m in Texas so I also have high property tax rates that cut into profits. If you can’t make the 1% work what do you use to determine if a property is a good investment? Do you just settle for less cash flow or is there something else you go by?

My overall strategy is to continue buying properties with the goal of having them provide me with passive income when I retire. I'm currently 39, so this is a long term strategy. All my properties bring in between $100-$500 a month after all expenses. Over time the rents have increased which has increased my cash flow. But so have my property taxes and insurance, so keep that in mind. I put all the cashflow aside and it just goes into the next property, so I don't plan on ever using any of it until I'm retired. You are just going to have to do the math. If the taxes in Texas make it cost prohibitive to invest there then you may have to look at other states. I live in Long Island, NY, there is no way I would ever buy any properties for investment here given the cost to acquire and the property taxes.

1 Reply
Phong Tran
Real Estate Broker · Portland, OR · Member since 2019 · 22 posts · 26 votes
4y
@Kevin Jennings What part of Texas!? I'm originally from Texas, so I completely understand the high property taxes on properties. Right now, I'm not using any specific "rule of thumb" or "metric" to follow by. I'm looking for properties that fit the criteria and I'm diving deep to crunch numbers, so I'm not specifically settling for less cash flow.
My recommendation is to figure out what your investment goals are first! Then you can narrow it down with certain criteria for the homes such as how many beds, baths, SQFTs, pricing, location, etc... Location is key, if high taxes are a concern try to find specific counties that having much lower taxes than others.
Good luck!
1 Reply
Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
4y
I agree with everyone's comment. I do want to provide you with a little more information on the topic, so I linked an article below
https://www.fortunebuilders.co...
I hope you find this use and don’t forget that BP also has tools you can use. You are more than welcome to reach out if you have any further questions. Good Luck and go make it happen!

[email protected]832-776-9582 Podcast Guest on Show #469
NETWORTH BUILDERS5236 Reviews
Website View Page
1 Reply
Kevin Jennings
OP
New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote
4y
Originally posted by @Kevin Hart:
@Kevin Jennings Its hard to find deals that meet the 1% rule on market, even in my market of Louisville, KY which tends to be pretty affordable. Have you considered the BRRRR method? That is how I get my rentals. It builds in equity and helps me exceed the 1% rule every time. Also, get connected with your local wholesalers and other investors. You'll find much better deals off-market. Also, play around with the BiggerPockets calculator if you haven't already. It will help you get more comfortable with what is a deal and what is not.

I haven't thought too much about BRRRR for a couple reasons. The main one is that I'd have to hire contractors for all the work so I'm not sure if I was thinking I may not come out ahead.
0 Reply
Kevin Jennings
OP
New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote
4y
Originally posted by @Phong Tran:
@Kevin Jennings What part of Texas!? I'm originally from Texas, so I completely understand the high property taxes on properties. Right now, I'm not using any specific "rule of thumb" or "metric" to follow by. I'm looking for properties that fit the criteria and I'm diving deep to crunch numbers, so I'm not specifically settling for less cash flow.
My recommendation is to figure out what your investment goals are first! Then you can narrow it down with certain criteria for the homes such as how many beds, baths, SQFTs, pricing, location, etc... Location is key, if high taxes are a concern try to find specific counties that having much lower taxes than others.
Good luck!

I'm in the Houston area. Goals are just for growth/investment diversification. I'm not looking to leave my current job, but I also have a fair amount of off time which is why I'm thinking I may be able to do this. My focus is on SFR, but am also interested in some type of Vacation rental that I can also use myself if I can make that work.
0 Reply
Kevin Jennings
OP
New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote
4y
Originally posted by @Wale Lawal:
I agree with everyone's comment. I do want to provide you with a little more information on the topic, so I linked an article below
https://www.fortunebuilders.co...
I hope you find this use and don’t forget that BP also has tools you can use. You are more than welcome to reach out if you have any further questions. Good Luck and go make it happen!

I’ll give that a read. Thank you! Definitely trying to take advantage off everythjng on this site. There’s just so much that it’s taking a while for me to get through everything. Thanks!
0 Reply
Nolan Gottlieb
Investor · Member since 2020 · 39 posts · 30 votes
4y
Originally posted by @Kevin Jennings:
Originally posted by @Jason G.:
Originally posted by @Kevin Jennings:
Hello everyone. I am just starting to dive into real estate investing and still have a lot to learn before I either buy my first rental property or move and rent my current home. There is one thing that confuses me that I just can’t seem to find an answer on anywhere, at that is the importance of the 1% rule.

When looking on Zillow, every house I find, the rental estimate is less than 1% of home value. I also looked on roofstock, and with all the information that they put in for rental and expense estimates, etc, they all show negative cash flow. Even in my current house/neighborhood, I couldn’t imagine people being willing to pay 1% of what homes are currently selling for. Am I just out of touch with what people are willing to pay in rent, or is there something else I am missing?

I know you can factor depreciation into taxes, but am I correct in thinking that shouldn’t be factored into cash flow calculations?

Hope these questions don’t sound too dumb. Just trying to make sense of things as I continue to read and learn. Thanks in advance for the help.

After the subprime mortgage crisis the cost for properties dropped significantly and had taken some time to recover. During that time the "1% rule" was a viable strategy. However, in many markets the cost for properties have risen to the level where the numbers just do not work if you are picking them up at market value. For all my properties in the Atlanta Market, the values of properties have gone up significantly since I started purchasing them several years ago and while they were good investments to buy when I did, they would be horrible investments to buy now at their current values. As others have said, you can find potential deals with off market properties or those that need renovations. Always use your own numbers. You should be able to figure out the PITI on your own, what the fees are for the local PM companies, and also check what the local rents are for properties currently looking for tenants. Don't rely on Zillow or Roofstock or any other website, but definitely use those types of websites as a tool.

Good to know. Do you think right now is just an overall bad time to get into real estate?

Absolutely not! 1% rule is just one of the many filters you can look at a property through. Take a look at what your monthly mortgage payment is versus what the monthly rent would be. Work from there.
1 Reply
Casey Caton
Investor · Member since 2017 · 69 posts · 65 votes
4y
@Kevin Jennings It's still possible to find those 1% deals, but generally off-market. You've got to hit the streets, go to local meet-ups, reach out to everyone you meet and let them know what you're looking for. I've been using an amazing realtor who has helped me find some 1% type deals. Also, househacking is an amazing way to get started and live for "free." I would start by househacking if you're not already doing that. I've been doing it for the past three years and have saved over 27K to use for other deals. Wish you the best!
1 Reply
Kevin Jennings
OP
New to Real Estate · Houston, TX · Member since 2021 · 11 posts · 1 vote
4y
Originally posted by @Casey Caton:
@Kevin Jennings It's still possible to find those 1% deals, but generally off-market. You've got to hit the streets, go to local meet-ups, reach out to everyone you meet and let them know what you're looking for. I've been using an amazing realtor who has helped me find some 1% type deals. Also, househacking is an amazing way to get started and live for "free." I would start by househacking if you're not already doing that. I've been doing it for the past three years and have saved over 27K to use for other deals. Wish you the best!

The whole house hacking thing wouldn’t work for me now since I have a family. That’s definitely something I wish I would have considered when I was single though.
0 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
Keep in mind that "rules" are just meant to be fast ways to do high level evaluation. Some of these rules where created under different conditions, where asset class, market demand or interest rates where different.
The 1% rule doesn't take into account financing. For example if I was financing $100,000 for 30 years at 3%, my payment would be $115 lower than financing at 5%. This is why lower interest rates usually drive up prices on real estate. It also doesn't take into account expenses like repairs or CAPEX. You could have a 1% property that has major repairs needed, costing you hundreds a month.
It also depends on asset class. If you are buying D properties in a city with high supply, then 1% should be expected, but future appreciation of the property is lower. If I am buying A class properties in a low supply area, then I may be lucky to get 0.5%. The difference is future expected value of the asset. If high appreciation is expected, the selling price will reflect future value. Another way to look at this is risk. If future appreciation is high, risk is seen as low.
As with any rule, it is very important to understand the basis for the rule, rather than just blindly applying it. Many people refer to the 1% rule as the "monthly rent to purchase price". Then you get a number, instead of a rule. For example in my market B class properties rent at 0.7% of purchase price (based on MLS).
2 Reply
Kalim Kalla
Investor · Atlanta, GA · Member since 2018 · 103 posts · 116 votes
4y
One thing that I would consider in your analysis (and if I am incorrect I am open to correction) The 1% rule is mean to be 1% of the all in amount when you buy a BRRRR type deal. So even if you spend 140k to purchase and rehab a home and it appraises for 175k when you go for the refinance, to achieve the 1% rule you would need $1,400 in rent not $1,750. Hope this helps.
1 Reply
Leslie VillarealBusiness Member
Real Estate Broker · Albuquerque, NM · Member since 2021 · 67 posts · 32 votes
4y
Kevin,
Great question. In this fast paced and appreciating market don't be completely set on the 1% Rule. There are many other factors to consider such as market appreciation, loan buy-down that acts as a savings account for yourself, forced appreciation, being able to leverage your money to buy something that appreciates and being able to have a write off on your taxes depending what income you are in. When you take all these into factor the 1% rule isn't quite as important as adding these all up. Also you don't usually calculate loan buy-down when determining your cash flow & cash on cash return but if you did include that in your calculation your cash on cash return would increase.
Good luck in your Real Estate journey. Make it a great one.
Leslie Villareal
[email protected]505-480-6738
The VillaRealty Group- Leslie Villareal545 Reviews
Website View Page
2 Reply
Account Closed
Handyman · MN · Member since 2020 · 92 posts · 46 votes
4y
I'm not adding much for advice here however, just pulled up my Zestimate and they range me $115,000 - $200,000. Next door house is identical and attached to mine. 195-220k, rent estimate is $1449. Nobody in my neighborhood is getting that for rent!
Zillows great for hypothetical situations but today's active listings in your area may be a better approach to a deeper understanding of the rental rates.
1 Reply
Noah McPherson
Rental Property Investor · Duluth, MN · Member since 2021 · 127 posts · 38 votes
4y
@Kevin Jennings My duplex was at just under 1%. It still cash flows about $330 dollars, but I save $200 of that per month for capex and maintenance. Keep in mind, on market deals under 1% are okay sometimes. Sometimes the last landlord didn't raise the rent or they left you an opportunity to update the property. In either case, you can raise the rents.
1 Reply
Victor Funes
Rental Property Investor · Modesto, CA · Member since 2021 · 65 posts · 23 votes
4y
@Kevin Jennings I think it all depends on your market there is some markets where you can easily get that but others thag don’t but as long as your numbers work and you set up a minimum of monthly cash flow you expect than go for it. This rule is just to see if this deal is worth you looking deep
Into your deal but shouldn’t stop you from analyzing it.
1 Reply

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