1% rule still relevant?

Question

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?

Mark H. Porter · Answer

Calling it a rule is misnomer. All the 1% guide, along with a cap rate and NOI, should do is qualify your interest in a property. None of these should be deciding factors. Value is the key - be it appreciation, cash flow, return on investment ...

Marcus Auerbach · Answer

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.

Darius Ogloza · Answer

For those of us who live in the urban centers on the West Coast, these "rules" seem quaint - like a gas lamp or a buggy whip.

Ian Walsh · Answer

I always felt the 1% rule wasn't conservative enough.

Dawn Anastasi · Answer

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.

Steve Morris · Answer

Explain the "1% rule", I'm ignorant.

1% rule still relevant?

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