Is the 1% rule dead in 2023 ?

Investor · Atlanta, GA · Member since 2023 · 8 posts · 16 votes

I am a new to REI and trying to find my first deal. Have been listening to BP podcast episodes from 2020 and earlier and the numbers were no where near what they are today.

I have analyzed about 30 deals in Atlanta, Dallas and Columbus markets. Couldn't find a single property where it is meeting the 1% rule. Agreed that I looked at only MLS listings, but still.

Am I looking in the wrong place ? Or am I making any mistakes in my analysis? Not sure where to go from here.

Also, is there a place on BP where we can find market analysis? I am a pro member.
Please let me know how you guys are dealing with this

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

It's been dead, dude. Where have you been?

The 1% rule originated fresh off the hardest crash in over leveraged real estate coupled with the lowest interest rates. That's not a consistent theme to bet on, that's an aberration.

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Chad McMahan
Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 751 posts · 504 votes
3y
Quote from @Rakesh Balavanthapu:

I am a new to REI and trying to find my first deal. Have been listening to BP podcast episodes from 2020 and earlier and the numbers were no where near what they are today.

I have analyzed about 30 deals in Atlanta, Dallas and Columbus markets. Couldn't find a single property where it is meeting the 1% rule. Agreed that I looked at only MLS listings, but still.

Am I looking in the wrong place ? Or am I making any mistakes in my analysis? Not sure where to go from here.

Also, is there a place on BP where we can find market analysis? I am a pro member.
Please let me know how you guys are dealing with this
Hi Rakesh.
I see this same topic surface occasionally here on BP.
Nope, 1% is not dead. Although, many markets aren't yielding this. And, many real estate agents are not experienced enough to know how to accomplish this, even if their market can yield these results.

In my market, I'm consistently getting my clients (and myself) 1%-1.7%
0 Reply
Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
3y
Quote from @Pete Harper:

Quote from @Eric James:

Quote from @Pete Harper:

Quote from @Rakesh Balavanthapu:

I am a new to REI and trying to find my first deal. Have been listening to BP podcast episodes from 2020 and earlier and the numbers were no where near what they are today.

I have analyzed about 30 deals in Atlanta, Dallas and Columbus markets. Couldn't find a single property where it is meeting the 1% rule. Agreed that I looked at only MLS listings, but still.

Am I looking in the wrong place ? Or am I making any mistakes in my analysis? Not sure where to go from here.

Also, is there a place on BP where we can find market analysis? I am a pro member.
Please let me know how you guys are dealing with this

1% rule is not dead, you are looking in the wrong place. I just purchased a 2% rule property in Central Texas in March. My portfolio average on 38 units is 1.6%. I still screen at 1%.

1) You need to dig much deeper. All the easy stuff on MLS has been snapped up.
2) Look for small multifamily; duplex and foorplex. Much easier to cashflow with multiple units.
3) Look for off-market deals. I send out "yellow letters" using the county tax website. I also target tax auction properties.
4) Look in the secondary and tertiary markets outside the large metroplexes.
5) Be prepared to do renovations.

Purchase price from tax auctions would get more than 1%, but the problem is you can't invest money in repairs or refinance them for an extended period of time.

In Texas only six months on non-owner occupied. During the 6 month option period you can still charge rent. I purchased a property for $27k that rented for $500/month as-is. Still a 1.85% deal.

Yes, it's great when you can find habitable tax sale houses. While it's 6 months for previous owner to recoup their non homestead house, title companies won't give title insurance for much longer than that. They are afraid of someone contesting whether the tax sale should have even occurred. So refinancing takes a while.
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Christopher Sandys
Member since 2023 · 92 posts · 60 votes
3y
Last May I bought my first Single Family Home for $64,000 plus about $5,000 in rehab. So a total of $69k. It rents for $1,100/month. That's 1.6%. Bought it off of the MLS. I had only 3% down on a conventional loan. Not quite as good as @Engelo Rumora, but another Toledo deal.
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Scott AllenBusiness Member
Real Estate Agent · Columbus, OH · Member since 2020 · 449 posts · 471 votes
3y
@Rakesh Balavanthapu
You'll need to get connected with rockstar agents that are sourcing off-market deals to find the 1% rule. If you put something in contract on the market that might need a little bit of work - you might be able to negotiate it down to a 1% rule but it will most likely need cosmetic work that others do not want to deal with, or outdated mechanicals near end of life use. Take advantage of anything you see that is sitting for more than 2 weeks to a month that looks like it could use some work.
[email protected]614-698-1227
Reafco - Columbus, OH
Website View Page
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Michelle BatemanPro Member
Realtor · Kansas City, MO · Member since 2019 · 108 posts · 52 votes
3y
The 1% rule is not dead, we see those all of the time in the Kansas City metro area and know of other markets that also see the 1% rule! Reach out if you're interested in more info!
[email protected]
3 Reply
Steven Foster Wilson
Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
3y
Quote from @Account Closed:

I still come across deals like this in Columbus, though they're more rare in this market. Find off market deals beyond just what's offered on the MLS. Cleveland also a good market to look at if 1% deals are your primary goal.

On point! Cleveland and Columbus are your go to market 2023. Cleveland is a more stable cash flowing market while Columbus will be the best spot for appreciation. I recently did a flip there. You can pretty much find properties that will be able to provide you that 1% rule!
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Account Closed
Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes
3y
@Rakesh Balavanthapu
Come to the Midwest, damn near every C/D property is still 1%+. That said, it doesn't make it a good deal on its own.
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John Vietmeyer
Investor · Johns Island, SC · Member since 2014 · 120 posts · 41 votes
3y
I guess this conversation means the 2% rule is out to pasture.
2 Reply
Luka Milicevic
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
3y
I'm so glad this thread is here now so that I can bookmark it and show it to potential investors that reach out to me.
I've been telling investors that reach out to me that I can't find them anything close to the 1% rule and they get upset with me, so much so as calling me negative. They just finished bigger pockets podcast episode 6 that was recorded in Circa 2015 and are expecting to find 1% deals and fix/flips at 70% ARV minus repairs. Have you tried going back and investing in 2018? That's the best advice I can give.
Yes, they exist I'm sure of that, but if I ever found a 1% deal in my market I will pull money out of my children's college funds to buy it if I have to. There's no way I'd give that deal to anyone else.
Probably in the midwest you can still get them, but speaking for my market it's just highly unlikely.
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Tamera White
Rental Property Investor · Raleigh, NC · Member since 2022 · 33 posts · 23 votes
3y
Quote from @Christopher Sandys:

Last May I bought my first Single Family Home for $64,000 plus about $5,000 in rehab. So a total of $69k. It rents for $1,100/month. That's 1.6%. Bought it off of the MLS. I had only 3% down on a conventional loan. Not quite as good as @Engelo Rumora, but another Toledo deal.

1 Reply
Tamera White
Rental Property Investor · Raleigh, NC · Member since 2022 · 33 posts · 23 votes
3y
Chris
Wow@ This is great!! Which lender did you use for 3% down on an investment property. Is it units where you live in one and rent the other. Please provide more info. Thanks!
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Zach Oehlman
Investor · Nationwide · Member since 2019 · 30 posts · 37 votes
3y
Welcome to BP @Rakesh Balavanthapu!
Everytime I hear a "rule of thumb" valuation metric I cringe...lol
And that is exactly what the 1% metric is.
I have valued everything from public companies, private companies, human capital, hybrid debt, credit unions, etc and they all have rules of thumbs to use in their valuations....
And...
Unless you understand how to interpret the rule of thumb metrics it is useless and has so much risk because you don't know the numbers.
Take the time to understand the numbers line by line and then you will be able to use the rule of thumb metrics and will be able to create your own rule of thumb metric for the specific types of deals you like. These will vary in different markets as different markets have different metrics.
There is absolutley no short cut around this and if you try to short cut it you will get your "thumb" cut off :)
BP has a great resource here: https://store.biggerpockets.co...
Let me know if you have any other questions around finance / valution as that is my area of expertise.
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Christopher Sandys
Member since 2023 · 92 posts · 60 votes
3y
Hi @Tamera White, For my deal I did a 3% conventional, first-time homeowner, owner occupied. Upon purchasing, I decided the potential cash flow was too lucrative to occupy. I am a single man, and I didn't need 3 bedrooms, 1.5 baths. It would be nice, but I decided to take cash over the luxury.

I worked with Tony Brancatto at Ruoff Mortgage in Maumee. Tony is very solid. He hustled a lot to get the city to inspect my property for a potential grant. [The grant was not approved due to peeling paint on the exterior. Never trust Toledo grants - but that's another story]. When I explained to Ruoff that I was not going to occupy the property they were not over-joyed, but they also were not surprised. The mortgage was sold to 5/3 Bank within a week of closing. Both the debt and the servicing. Ruoff requested that I occupy the property for at least 3 months, and pay my mortgage two weeks early. The reason being that 5/3 thought they were buying an owner-occupied property, not an investment. It is a sign of good faith to immediately establish responsible and sound payments. Since I got started that way, I've kept it going since then.

So, the 1%+ rule is absolutely alive and well. (Although, as @John Vietmeyer observed, no one is brining any examples of the 2% rule). However, I'm keeping my eye on Toledo. I'm hopeful that prices will drop, and I'll be able to get a 2% rule property. That would be a $55,000 property renting for $1,100, which is not that much of a stretch here. I am keeping my eyes on the MLS. Yep, I said that.

I do not like to tell people how to run their business, but I will offer something for consideration. There are those that invest for cash-flow, and those that invest for capital appreciation. And most properties are a hybrid of the two, favoring one way or the other.  Hypothetically, higher benchmark rates should harm the value of real estate properties. We are already witnessing that happen. With that in mind, would you prefer a property that favors cash-flow, or a property that favors appreciation? Just something to consider.
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Pradeep Shrestha
Investor · Cincinnati, OH · Member since 2022 · 34 posts · 13 votes
3y
We analyze off-market properties in Cincinnati and it still works like a charm. The markets that you've mentioned are a little difficult.
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Timothy W.
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
3y

Yikes..... This is EXACTLY what people were saying in 2007/2008. Down to the same cities named. This is not a good sign. Trust me, you can look back at my old posts from then and I was that guy, saying the same thing about South Bend, Indiana. Yeah I could find stuff at the 1%, 2%, 3%, 4%, 5% rule all day long. The reason why is no one could afford to buy anything. They also couldn't afford to pay their rent. No percentage matters when people don't pay their rent. Be careful. Make sure you can cover the costs of these turning cashflow negative.
1 Reply
Najma Osman
Real Estate Agent · Columbus, OH · Member since 2023 · 161 posts · 217 votes
3y
@Rakesh Balavanthapu I still see 1% deals in Columbus, Ohio.
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Christopher Sandys
Member since 2023 · 92 posts · 60 votes
3y
Just missed one in Toledo that is very close to 2%.
Noticed on Zillow that this one sold for $47,000. It is currently renting for $900/month.
https://www.zillow.com/homedet...
That is 1.9%. Granted, you'll need to cover the closing costs, so the actual ratio may be only 1.75%.
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Christopher Sandys
Member since 2023 · 92 posts · 60 votes
3y
Quote from @Timothy W.:

Yikes..... This is EXACTLY what people were saying in 2007/2008. Down to the same cities named. This is not a good sign. Trust me, you can look back at my old posts from then and I was that guy, saying the same thing about South Bend, Indiana. Yeah I could find stuff at the 1%, 2%, 3%, 4%, 5% rule all day long. The reason why is no one could afford to buy anything. They also couldn't afford to pay their rent. No percentage matters when people don't pay their rent. Be careful. Make sure you can cover the costs of these turning cashflow negative.

It's pretty tough to go cash-flow negative when you have 2x coverage. Don't worry about the Midwest. My recollection of history is vastly different. What I recall happening in 07-08 were the markets in SoCal, Nev, SoFla getting slaughtered. The strategy there was not cashflow, it was appreciation. I was working as an institutional MBS salesman and had a front-row seat for the collapse. My clients who were smart money were buying OH, IN, PA. The boring stuff. The cashflow.
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Timothy W.
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
3y

It's actually pretty easy in a market where people just don't have the income to pay rent and stop caring about their credit. I'm sure you know people who knew people when you were one of the securities salespeople behind the collapse from your office 2,000 miles away, but I was there on the ground.
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Christopher Sandys
Member since 2023 · 92 posts · 60 votes
3y
@Timothy W. I am sorry to hurt your feelings, but there is no need for insults. I did buy and sell several billions of whole loans (non-securitized mortgages), so, yes, I knew some people. And thanks for blaming the collapse on me. None of your pettiness changes the fact that 2x coverage allows one to cut rent in half and still stay above water. Further, I stand uncorrected in stating that the issue was appreciation seeking, not cash-flow seeking. Let me explain to you, Tim, the terms of LTV and a negAM mortgage. LTV is Loan to Value. You know this as percentage of equity. When a homeowner is 100 LTV, that means they are zero-in for equity. This was common in the period, because people were counting on appreciation. It worked until it didn't, then they were underwater and walked away. That is the collapse, and those are the ones that created it. Now, a Negative Amorization Mortage is also called an "option ARM." This was initially designed for high-net-worth individuals as a cash management tool, but it spread to the masses. It allowed one to forgo principal and interest payments, thereby increasing the loan amount by increasing the LTV.
"On the ground." Okay, hero.
Again, sorry to hurt your feelings with a correct rendition of history.
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Tara Wasinger
Wichita, KS · Member since 2023 · 6 posts · 1 vote
3y
So glad I came across this thread because I just finished reading How to Invest in Real Estate and was going to use the 1% rule as well. Thanks for posting!
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Timothy W.
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
3y

Again, it doesn't matter how much you "can" cut the rent when the tenant pays zero. Let me ask you this, when the tenant doesn't pay the rent and the landlord turns around and doesn't pay the mortgage because the tenant doesn't pay the rent, does the bank accept a technical explanation of hypothetical loan terms in lieu of payment? Is that the procedure?
0 Reply
Bob S.
Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
3y
Quote from @Rakesh Balavanthapu:

I am a new to REI and trying to find my first deal. Have been listening to BP podcast episodes from 2020 and earlier and the numbers were no where near what they are today.

I have analyzed about 30 deals in Atlanta, Dallas and Columbus markets. Couldn't find a single property where it is meeting the 1% rule. Agreed that I looked at only MLS listings, but still.

Am I looking in the wrong place ? Or am I making any mistakes in my analysis? Not sure where to go from here.

Also, is there a place on BP where we can find market analysis? I am a pro member.
Please let me know how you guys are dealing with this
Heck no, I just got 2% + rule 15%++ net caps cash purchases. Its all about knowledge and your network/ Yes you are wasting your time on listed deals. All 500 or so of mine have been cash, and OFF market,
good luck

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Vadim F.
Investor · Member since 2020 · 337 posts · 213 votes
3y
@Rakesh Balavanthapu the 1% doesn't exist in the markets you mentioned that you have analyzed, those are appreciation markets. If you want to hit 1-2% rule, look at Cleveland, Toledo, and Detroit.
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Alecia LovelessPro Member
Member since 2019 · 3k+ posts · 2k+ votes
3y
@Rakesh Balavanthapu 1% rule depends on your market and your deal. I still see them but sellers are still being greedy with their prices even with the market starting to cool.
My current deal, if I get it, and my last deal, one month ago are closer to 2%, both in nice neighborhoods but requiring rehab money and repositioning then will be strong properties. Both are in good condition to start out but the little repairs add up after management has been poor.
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