Do you go below the 1% rule when buying mutli-family? Where/why?

Question

In today’s market and where we are in the economic cycle I think it’s even more important to follow the one percent rule especially when borrowing money. What do you think?

Chase Louderback · Answer

@Mike M.

I haven't heard of many people doing the 1% rule for smaller multifamily.  For the smaller deals like you are talking about I have heard of people wanting $200/door cash flow for it to make sense.  You may have to get into the details a little more to see if it makes sense for yourself on these.

Sam Grooms · Answer

I haven't heard of people buying large multifamily based on the 1% rule.

Theo Hicks · Answer

It is better to fully underwrite every deal you are interested in pursuing rather than following a "rule".

Oleg Shalumov · Answer

@Mike M. 1% rule is one of the best filter when you are looking for a property. If the property passes the 1% then you can look into it and analyze farther. If it does not meet 1% rule - just pass and move onto next property.

Todd Dexheimer · Answer

I've never used the 1% rule on Single family or multi-family of any size. When I think about my portfolio, however, I would never buy anything at that level. For me every house had to have positive cash flow of $300, duplex $400, triplex $600 and Quad $800. I also needed to be able to refi and get my capital back.

Serge S. · Answer

@Mike M. 1% rule is very rough BUT can be a very good 1st filter. Underwriting a 10 unit is not so much different than a 50, 100 or 200 unit.  1% gross rents to purchase price is a ghost in just about any growing market today. The tax advantages of rental income are now unmatched and this has made multifamily a preferred investment asset class. What if I was to tell you a deal was buying at .5% gross rents to purchase price combined with a 1:1 debt coverage (meaning all NOI went to pay mortgage) and for that privilege you had to remodel 100 C class units just to sniff 1% and only then hope to resell to the next sucker for .5% again. And I'm not talking about SF or LA I'm talking PHX, Denver, etc. Thats pretty much what a lot of syndication deals are looking like today. I have a lot of difficulty projecting past 3 years right especially in terms of rent growth. Population growth is a given in the short term but so is supply growth. Will incomes keep up?  I need safety in cash flow and sustainable debt. Average rents the working class will flee too not only fickle millennials. Downturn becomes a buying opportunity, continued growth additional gravy.

Brandon P. · Answer

IVe been struggling with the same thing in CA. Can’t seem to find the 1% rule!

I am questioning myself why do I want a MF. What are the benefits bs. Sfh or more than one house on a lot?

Seems like you would want something better than the 1% rule for MF....let’s say you buy a 4 plex, you have 4 groups to manage PLUS any conflict between these group..

PM fees are higher and possibly more liability! Let’s say you the 4 plex has 4 HVACs. That is a lot of capex for a min return per unit.

What are the benfits of MF?

I’m not sure....

Caleb Heimsoth · Answer

@Mike M.  This seems to be like a good way to lose money. I’d say maybe for a single

Family but not multi

Jim Cummings · Answer

1% Rule seldom works in Texas due to High Property Taxes. Typically having to put down 25% DP. If you can get close to 1% after Down Payment, that would be great.

I typically look for $800 minimum spread between Rent and Mortgage as a minimum starting point.

Getting difficult to find with accelerating Values and slow rental growth.

Cory Carlson · Answer

The 1% is a generalist forum tool that is far from true is many markets. In some markets, people are shooting for 2% in others they are far from 1%. I would study the market and do dozens of analysis in said market and come up with your own determination on value.

Also the difference between a 4 unit and 6 unit to an underwriter at a bank can be very different so thats an important question to ask your lender.

Do you go below the 1% rule when buying mutli-family? Where/why?

Most Popular Reply