Expecting 1% of market price of the house as monthly rent.

14 Replies

Is that the rule of thumb?

So for a 2-story house with a basement unit (combined for a total of 2 units) with a market value of $550,000 that also has 6 parking spots, 3 indoor and 3 outdoor I should be able to collect a total of $5,500 monthly rent? The house is in a good location in terms of crime and proximity to the downtown chicago area. It has a nice yard and outdoor patios for all units. It was renovated recently and features a rather artsy interior.

Also it was stated that the 2-story house can easily be converted into 2 separate units by adding a kitchen to the second floor. How much would it cost to do that? And if I do that, would I be able to get even more rent income by having 3-units instead of 2?

@Jun Zao this depends. The 1%rule doesn't mean you will get that rent. That means If you do find a property with the 1% rule being followed, the numbers usually make sense. How much do these units normally rent for?

Originally posted by @Robert Herrera :

 How much do these units normally rent for?

 No Information on that on the Redfin ad.

@Jun Zao check Craigslist for similar ones in the area currently being offered for rent. Are you using an agent?

it's used as a tool to QUICKLY evaluate a house to see if it's worth going forward. There are many reasons why the property could still be a deal but they don't really apply to the reason you'd use this.

You'd look at the % of rent to purchase price if you're hunting for cashflow. Typically the higher the % the lower chance property has for appreciation. The lower the % the greater chance you have for appreciation (at the expense of a lower cashflow).

For rental comps:
Zillow est rent (if it's not a normal property then this is probably worthless)

Hotpads
Rentometer

Craigslist

Originally posted by @Robert Herrera :

Are you using an agent?

 Nope. Currently I am just browsing Redfin. So you think I can ask an agent to answer this question?

The only way I can think of that I would archive ~$5,500 monthly rent income is:

2-story house (3-bed, 2-bath): $3,000 

basement (1-bed, 1-bath): $1,500

3 indoor parking spot: $200 each ($600 total)

3 outdoor parking spot: $100 each ($300 total)

That comes out at a total of $5,400 per month of rent.

Originally posted by @Brie Schmidt :

The 1% rule is just a quick estimator, it is in no way to be used instead of due diligence.  It is pretty hard to find 1% properties on the north side of Chicago.  Here are links to properties my clients have purchased 

https://www.biggerpockets.com/files/user/chicagobr...

https://www.biggerpockets.com/files/user/chicagobr...

That will give you a good idea of what to expect

Thanks for that info.

The property that I'm looking at is in East Pilsen close to Chinatown and UIC. What can I expect from that?

It's more realistic to apply it to a 150k house renting for 1,500 or 300k duplex renting for 1500/side... etc

@Jun Zao I think you're looking at it backwards.  Look at the rent that the property can get and THEN see if it meets the 1% rule (of thumb).  Don't "assume" that you should be able to get 1% of the listing price in monthly rent.  Try seeing how that works in San Diego, hint: it doesn't.  The same with most desirable areas with a heavy owner occupancy.  That aside, it's just a rule of thumb.  The rubber hits the road if you (as the owner) have to pay for utilities, lawn care, etc. in some scenarios and not in others.  Obviously, the more bills that the tenants foot the better for you as the owner.

The 1% rule will kill you if you use it that way.

To offer a single data point, I’ve looked for turnkey rentals in the Denver proper area (hot neighborhoods) and have never seen rent that matched the 1% rule in the last 18 months. With prices this high (400-550k), you’ll never find tenants who will shell out 5000/month POST tax.

Rents have ceilings unless you’re in a ridiculous neighborhood and offer luxury amenities.

Even IF it all goes in your favor with those prices you outlined you still don't hit 1%

Much easier  to follow @Matt K. wise words

Originally posted by @Andrew Johnson :

@Jun Zao I think you're looking at it backwards.  Look at the rent that the property can get and THEN see if it meets the 1% rule (of thumb).  Don't "assume" that you should be able to get 1% of the listing price in monthly rent.  Try seeing how that works in San Diego, hint: it doesn't.  The same with most desirable areas with a heavy owner occupancy.  That aside, it's just a rule of thumb.  The rubber hits the road if you (as the owner) have to pay for utilities, lawn care, etc. in some scenarios and not in others.  Obviously, the more bills that the tenants foot the better for you as the owner.

In San Diego (not including the worst neighborhoods) 0.75% is a good rent to cost ratio 0.7% is pretty good). This ratio will cash flow nicely using realistic numbers (vacancy, maintenance/cap expense, PITI) if financed via a conventional loan and self managed. If including equity pay down they will cash flow nicely using a PM (10% or rent). I define nicely as worth my time. I would not take on a unit for little compensation as buy n hold rentals are not 100% passive. $150 unit cash flow with high potential for the cash flow to increase via rent appreciation is near my minimum to refer to the cash flow as nice. Less than that is only OK and does not provide good compensation for the effort until the cash flow increases.

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