1% Rule Calculation

[Max Householder]

A few quick questions about the 1% rule while digesting the BP Intro to Real Estate Analysis.

Do you subtract vacancy from gross monthly rent to get the numerator?

What do you use for the denominator? A) Just the purchase/list price of the property? B) The the total cost to acquire it (including closing costs, repairs, etc.)? C) I also saw another website that said to only use the mortgage principal, but this seems strange since you might be paying cash.

Thanks in advance!

[Eric Black]

Hi Garrison,

I haven't read the Intro to RE Analysis you are referring to so maybe I am commenting on a different 1% rule.

The 1% rule I am referring to says that you should rent the house for at least 1% of what your purchase price was. So if you purchased a house for $100,000 then it should rent for at least $1,000 per month. That is not after expenses, after mortgage payment, it's just 1% of whatever you paid for the house, regardless of whether you are paying cash or using financing. And remember, this is more of a guideline, not a rule. Some people don't consider a property a good deal unless they can get 2-3%. It just depends on your market and your personal criteria.

Again, I apologize if I am referring to a different 1% rule but hope it helps.

Eric