1% rule still relevant?

6 Replies

Is the "1% rule" still relevant in the current interest rate environment? It seems to me that interest rates are so low now that more properties can be considered investment grade. The mortgage cost would be low enough to still generate positive cash flow well below the 1% threshold. Should a new rule of thumb be utilized to evaluate properties?

I would say yes - as a rule of thumb! It has never been a precise metric. 

Most of what I have bought in Milwaukee in the last years is more like 0.9% ish, sometimes lower - but also in excellent condition when it comes to major capex. In other words my acquisition cost is higher, but I don't have to spend much on capex in the next 10 or 20 years.

So you have to also look at the financial context.

Let's say you buy a 200k property that needs a new roof, siding and windows and rents for $2,000 - perfect 1%. But you will spend about 40k on exterior in the next years. If you buy it with new exterior already done for 220k it's a 0.9% deal. I would still say it's a much better deal. 

The idea behind the "1% rule" (or some use "2% rule") is that the purchase price should be no more than 100x (or 50x) the amount of rent. (Conversely, rent is 1% or 2% of all-in cost.)

Example 1% rule:  A house that rents for $1,000 a month, you should pay no more than $100,000 for.

Example 2% rule: A house that rents for $1,000 a month, you should pay no more than $50,000 for.

And these amounts are "all-in" costs, meaning including initial renovation costs to get it rented.