Castro Valley, CA · Member since 2017 · 11 posts · 0 votes
Hi guys,
I have 3 questions about the 1% rule for rental properties. Is the 1% computed on the asking price or is it calculated on asking price minus down payment?
Consider the following scenario:
Asking price = selling price = 100,000
Down payment = 20% = 20,000
Base = 80,000
1% of 100,000 would be 1000
1% of 80,000 would be 800
My second question:
Is there a similar rule for residential properties?
Last question:
How do you account say $20,000 of fixing up the property to make it rentable?
El Segundo, CA · Member since 2017 · 43 posts · 48 votes
9y
@Abulele Woldulele I'm going to gave to disagree with what's posted in Investopedia. First off, the 1% rule is a general rule of thumb that's supposed to help you quickly determine if a rental property is a good deal. Investopedia is on the right track saying that the rule is supposed to ensure it covers your mortgage, but it's much more than just the mortgage, it's the insurance, taxes, maintenance, etc costs that are in addition to your mortgage. Therefore, the 1% rule is applied to the entire purchase price, not just what's left after the down payment.
Let's say a house is priced at $100,000, you decide you're feeling generous and put a down payment of $70,000, leaving only $30,000 of a mortgage. Do you think you just need to make sure your rent is $300 and you're good? Don't think so.
El Segundo, CA · Member since 2017 · 43 posts · 48 votes
9y
@Abulele Woldulele I'm going to gave to disagree with what's posted in Investopedia. First off, the 1% rule is a general rule of thumb that's supposed to help you quickly determine if a rental property is a good deal. Investopedia is on the right track saying that the rule is supposed to ensure it covers your mortgage, but it's much more than just the mortgage, it's the insurance, taxes, maintenance, etc costs that are in addition to your mortgage. Therefore, the 1% rule is applied to the entire purchase price, not just what's left after the down payment.
Let's say a house is priced at $100,000, you decide you're feeling generous and put a down payment of $70,000, leaving only $30,000 of a mortgage. Do you think you just need to make sure your rent is $300 and you're good? Don't think so.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
9y
I use the 1% rule to quickly rule out properties. Because of high property taxes in my area, anything at or below 1% purchase l price will never cash flow. In my area, even 1.5% can be tight.
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
9y
It's 1% of value, not purchase price, not down payment, etc. Value. That being said, I never use that rule. It doesn't apply to every deal or market. Rent on a $300,000 property will not be $3,000 anywhere I've been. Rent on a $50,000 property will not be $500.