1% Rule - Realistic?

Buying & Selling Real Estate
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1% Rule - Realistic?

Bryan Beal
Rental Property Investor · Greenville, SC · Member since 2019 · 115 posts · 264 votes

I know we're all read about the 1% when it comes to real estate investing.  For those who don't know what it means, it goes like this -

  • A property that costs $100,000 should rent for at least $1,000 per month
  • A property that costs $200,000 should rent for at least $2,000 per month
  • A property that costs $300,000 should rent for at least $3,000 per month

So on and so forth.  

The markets I'm in (and feel like I'm successful in), these numbers are very difficult to attain - specifically when you get about $150,000 purchase price. Granted, I focus in the SFR territory so I'm sure it's more attainable in multi-unit deals but I seem to settle more in the 0.7-0.8% realm. Is this more of a rule of thumb for multi-unit deals? Should this also apply to SFRs? Any input would be greatly appreciated!

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Bryan Richardson
Rental Property Investor · Indianapolis, IN · Member since 2018 · 189 posts · 141 votes
7y

@Bryan Beal

I'm getting about 1.5 all the way to to 2.25 on my rentals. I'd look in different areas if I was you

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  • Daniel Iles
    Accountant · Fairbanks, AK · Member since 2018 · 6 posts · 4 votes
    7y

    @Bryan Beal

    I thought about this a lot myself when I first began looking for properties near me. It seemed only 1.5% and lower while I was hearing of 2% deals on biggerpockets. After analyzing over 20 rental units in my area I came to the conclusion it wasn't reasonable. Multi-families got close but all SFH we're all under 1%.

    I changed strategies to comparing market caps and started seeing differences between properties that were easier to understand. I have analyzed a lot more deals since then and highly recommend looking at market cap when the 1% rule doesn’t work for you.

    Lastly, in general, SFR bought without many issues to fix won't have as high of a cap rate as multi-families. I recommend running the numbers and seeing the difference yourself. You may consider switching to multi!

    2Reply
  • Bryan Beal
    OP
    Rental Property Investor · Greenville, SC · Member since 2019 · 115 posts · 264 votes
    7y

    @Daniel Iles thanks for the input, greatly appreciated! I probably should have mentioned in my original post that I’m buying class A properties averaging around ~$225K - I don’t think buying at that number and that class of asset this is a fair benchmark. If you’re buying homes for $30/$40K per, that’s another story. I guess, like most things, it’s a matter of context.

    0Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    @Bryan Beal obviously that return is location dependent. What people fail to mention is real estate markets are fairly efficient, which means the purchase price to rent ratio is largely dependent on expectations of appreciation, and those expectations are “baked into” home prices

    1Reply
  • Chris McKenzie
    Rental Property Investor · Cherry Hill, NJ · Member since 2016 · 16 posts · 3 votes
    7y

    @Bryan Beal

    If you are analyzing 25+ deals and looking for ways to narrow it down to the best, then yes, a range of 1%-2% is a decent range to help narrow it (among other things). I’d never buy a rental based on that alone though.

    0Reply
  • Craig Bliss
    Flipper/Rehabber · FL · Member since 2019 · 15 posts · 2 votes
    7y

    @ Ronald Cooperman would you care to provide additional details wrt "limited partnerships"?

    0Reply
  • David Lust
    Member since 2019 · 8 posts · 4 votes
    7y

    @Bryan Beal my first property is a 3 unit and I’m at about 3% with rent vs total payment. Any input ?

    0Reply
  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    7y

    @Bryan Beal

    At some point the 2% rule became the 1% rule. Not sure when but go back to the early podcasts.

    With that being said I am getting about 1.3% in philly, including renovation costs. But it gets harder and harder to find.

    Often times it is closer to 1% at first, but rents have been going up lately (although this year they seem to have stalled out).

    1Reply
  • Phillip Richardson
    Rental Property Investor · Middletown, CT · Member since 2015 · 45 posts · 11 votes
    7y

    @Bryan Beal I've found SFR are difficult to apply the model to, especially in "good" markets. Multiple doors are always the way to go.

    0Reply
  • Junior Soares
    Contractor · San Jose, CA · Member since 2018 · 262 posts · 407 votes
    7y
    @Bryan Beal Plenty of 1% deals out there in great markets! all of my properties are at least 1%, however I have a few under that in the coast but that's an appreciation play for me. If you want cash flow, deals are out there especially right now I've been finding alot of distressed sellers in the midwest Cheers
    0Reply
  • Bryan Beal
    OP
    Rental Property Investor · Greenville, SC · Member since 2019 · 115 posts · 264 votes
    7y

    @David Lust man, I think that’s great! Did you it this place for just cash flow or did you buy it because it has appreciation potential?

    0Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    7y

    @Bryan Beal I think every investor has to find their own sweet spot regarding all the "rules". Personally I don't pay much attention to the 1% rule but focus more on cap rate when buying and IRR to measure performance over time. Being in a high appreciation market with increasing rent, most of my purchases were around .6-.8% but have since gone above 1% with rent increases. As far as owning them I actually prefer the ones that were lower on that scale, closer to half a percent. In just a few years we've seen extremely high IRR on those compared to the ones that approached 1% because they are class A meaning easier to manage, less expensive to own, much higher appreciation leading to increased equity and wealth. For example one that we were just barely breaking even on in the beginning, and actually negative about $30k on during the first year because of improvements, has appreciated over 7 figures in just a few years which would have taken literally 1,000 years to get to with cash flow if it had been a 4-5% deal with flat appreciation. So for me I want a little bit of both, some cash flow and some appreciation, not negative cash flow but not negligible appreciation either, because increased wealth is what makes it all worthwhile to me so projected IRR is a much better metric to use than the 1% rule. If I just wanted a couple thousand bucks in cash flow a month, I'd keep everything parked in dividend stocks and not deal with the hassles of owning property, so I've got seek out the smart plays where the IRR beats what I can get consistently in truly passive stock investments. They say don't buy on appreciation speculation due to risk of values decreasing, but the fact is a lot of these 4-5% low end rentals are extremely high risk themselves. On a $80k property with even 5% rent to purchase price ratio, your gross annual profits aren't that great in total and can be wiped out with one unexpected event like a furnace or sewer line or an eviction/vacancy or even something as basic as a water heater clapping out and leaking everywhere (there are a boatload of uncontrollable variables when dealing with low end rentals), so 5% on paper often ends up being 0% or worse and you're just suffering the brain damage of managing a low end rental for nada. At least if it's appreciating you've got enough increased equity to make it a worthwhile endeavor. I think the answer for me is both, finding the right mix of cash flow and appreciation potential, which in my market means a 5-8cap which ends up being around 1/2%-.8% according to the 1% rule. Properties that meet the 1% rule can be found, but less people want those properties and they're priced the way they are for a reason.

    6Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Jeff S.:

    I get 4%+ in Portland but I did have to wait a while-uh that would be 28 years, but who is counting. The real return has been appreciation. With the 50% rule you are talking a 3 cap or 1/2% and it has been that way a long time. Appreciation drags rents up and it is easy landlording with happy renters. 

    The value add people are the only ones around here making a decent return from rents and you need to know what you are doing.

    yup give me a .05% for a long term hold in a great area.. end of a 25 year run.. compare that to a 2% deal in other markets 

    see what the real IRR is..

    cant discount that those that enjoy the better higher numbers we see posted above are ALL locals who source their own deals do their own rehabs ( manage them ) and handle the tenant base personally.. or very hands on.

    other folks from other areas who have to hire it all out while they can do OK they cant feel defeated if they don't do what the locals do. 

    Also properties price for risk.. there is no question in that..  

    Podcast Guest on Show #222
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    1Reply
  • Samson Tefera
    Houston, TX · Member since 2017 · 29 posts · 2 votes
    7y

    @Bryan Beal. I have a property I bought in 2009 for $245k. Today it is worth about $390k.

    Are you saying I should be renting it for $3,900/month? Currently renting at $2,050/month.

    Almost all the houses in the same area all rent for $2000-$2400/month.

    I don’t know if that 1% rule works for higher amounts say > $250k.

    Thanks

    Samson

    0Reply
  • Marisa R.
    Developer · Atlanta and Detroit · Member since 2018 · 601 posts · 821 votes
    7y

    Currently doing this in Detroit market, seems to be working well so far

    Here are Some examples of nimbers on 3 properties

    Got some higher end values $70,000 but these are for flipping strategy

    $32,000 -  $800

    $36,000 -  $900

    $35,000 - $800

    2Reply
  • Account Closed
    Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
    7y

    @Lesley Resnick they are a bit aggressive, as one's should be when investing in an asset of such small scale where diversity doesn't dilute the effect of variability in expenses.

    100$ owner paid utilities on a 200k duplex is actually an optimistically low representation of sewer/water/garbage/mowing/snow removal (if pertinent).

    $2400 a year (in maint/repair/capex) is also a very fair representation. Most people don't buy properties will all components replaced in the last 5 years. If you take the cost of replacement of all components, divide each one by the number of remaining years of lifespan of that component, and total those yearly reserves for each component you will get your total holdback # for maintenance. This is a far more realistic approach than using a trailing 24 of schedule E's from the seller, or actuals as incidentals occur. 

    If you break down a few items:

    Roof: 20 years @6000 = 300/yr

    AC: 15 years @3000 = 200/yr

    Furnaces: 15 years @1700x2=3400 = 225/yr

    Water heaters: 12 years @800x2 = 1600 = 135/yr

    Windows: 30 years @ 4000 (low) = 135/yr

    Note that these numbers all assume these items are brand new when you bought the property. The # of years to be used are the *remaining* years in the components lifespan at the time of purchase.

    There's $995/yr right there, and it excludes any improvements required to plumbing/electrical/floors/paint/kitchens/bathrooms/siding/basements/garages/sewer lines/etc... On top of that, add a maintenance and cleaning budget. $2400 a year is more than fair as an average over time. Now, the variability year over year will be high... but over 30 years of ownership you will have performed all of those cap ex items with a hefty amount of maintenance to go with it.

    Unfortunately, I've found many investors I work with to have made investments in the past with Geoffrey Dollars. Commercial lenders just don't want to be on the hook for those irresponsible investing decisions, because they're actually lending bank dollars. 

    Conventional lenders don't bother much with debt coverage because the bank makes the profit, but spreads the liability over to Fannie Mae, so who cares. 

    0Reply
  • David Lust
    Member since 2019 · 8 posts · 4 votes
    6y

    @Bryan Beal . Sorry such a late response.  TBH i was blessed.  My mother was renting one of the apartments from the previous owner as i was looking to purchase my first multi family.  Well i was looking the previous owner told her he was thinking about selling it due to his age.  So we linked up and talked and worked out a deal and i bought it from the owner private.  Best thing that has ever happened for me.  

    0Reply
  • John Shea
    Investor · Falmouth, ME · Member since 2017 · 1 post · 1 vote
    6y

    Hi... for what it may be worth, and maybe not much... i tend to dismiss my capital investment. and apply the 1% rule to the balance-i.e. the 75% i have to mortgage. if that works, im good. im in an aggressive market, Portland Maine. MY FIRST POST! hope it has value. but im in  the black.

    1Reply
  • Tiffany SmithPro Member
    Member since 2018 · 23 posts · 6 votes
    6y

    I am bit confused on this rule. So, the formula states the property should bring in 1% of the sales price in rent. What I don't understand is if I am planning to BRRR and buy the property with the intention to fix it up. Should I still be using the sales price or should I be using the ARV. Therefore, the formula would be 1% of the ARV in rent. Response would be greatly appreciated.

    0Reply
  • Jason Taliaferro
    Real Estate Agent · Baltimore, MD · Member since 2014 · 113 posts · 71 votes
    6y

    @Dan H. I agree with your post. While you can find properties that rent at 1% in some areas in other areas ,IF you are getting  much higher than 1% or more it could come at a cost elsewhere like vacancies, turn over, and lost rent.  While I do not invest for appreciation that is a factor also. Over time you get closer or exceed 1%. So I wouldn't be tempted to buy in a bad area just because it looks like you will be getting 2% percents. The head aches from a bad area never go away.

    1Reply
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