Multi-Family Purchase using the 1% Rule ?

Question

For those of you with multi-family properties, do you find the one percent rule does not satisfy you when that property is financed thru a local bank on 20 Year amortization ?

I have been doing cash flow analysis but my question is Does the One Percent rule give an indication of

Proper value on properties with many units ?

I am not seeing it does so much in my market.

Jaron Walling · Answer

I'm lost by your question but you want to focus on the income method to determine value. It utilizes the net operating income and cap rates to determine the property’s value. This is by far the best method to analyze multi-family deals. I would throw the 1% rule out the window.

If you're looking at big properties the best deals are funded privately and either flipped or refinanced into a commercial loan. It depends on the strategy. I found a wonderful blog post from about 2 years ago discussing valuing multi-family deals.

https://www.biggerpockets.com/...

Taylor L. · Answer

It really takes more detailed underwriting to figure out if a deal is good or not. Larger multifamily takes real underwriting to evaluate. The 1% rule only takes gross potential rents into account, and leaves out potential operating expense reduction.

Mark H. Porter · Answer

Remember that 1% rule and cap rate are merely qualifiers that will make you look deeper into the purchase.  For instance , a cap rate of 8% may make me take a 2nd look but because that can be manipulated by deferring maintenance I know I need to dig deeper into the books and history.