1% Rule

7 Replies

Hi All,

I'm very excited to get more involved in the BiggerPockets community! I currently own a condo and rent out a room but am looking to move into a duplex.

As I'm doing my research I find it very hard to find properties that would meet the one percent rule. I live in Portland, Oregon, and multi-family properties that don't require a ton of work are at least 400k.

I judge an investment based on the expected return of the initial investment. For example, putting 80k into a property (we'll say the house is purchased at $375k and the rest of the money is used for fees and updates) that can net $1,000 a month seems like an excellent return even if you aren't meeting the one percent rule and getting $3,750/mo in rent.

The $1,000 a month gives a 15% return annually on the 80k which, in my mind, is tough to beat. I have a significant nest egg already set aside for any issues that come up with the property.

Is my thinking flawed? Do most investors here truly meet the one percent rule?

Thanks so much!

There really aren't any "rules" that can be applied across all geographies, other than "make sure you have a good exit strategy" ;)  . Percentages mean less the higher you climb on an actual income scale. If you can't make 1% at sub-100k units, you are probably doing something wrong. If you are making greater than 1% with units greater than 500k, you are probably riding a serious bubble. 

There's a floor and a ceiling to rent capacity everywhere. Lack of "1%" has a lot of people chasing other markets, or investing for appreciation, new construction, etc. 

The 1% number is the gross monthly rent. You said your property would Net $1000. You then in the same sentence compare it to $3750 Gross rent. If the rent is $1000 a month total or even after PITI then there are a lot of expenses you are not considering; vacancy, repairs, turnover cost, evictions, permits and registrations, management, Utility bills left unpaid by tenants, Etc. etc.

@Matt Kitto , even if you're grossing $2,000/m in order to net $1,000/m in rent, I hope you realize that your MORTGAGE repayments alone for your $295,000 mortgage is likely to be roughly $2,000/m, unless you can get a SUPER low interest rate, amortized for a full 30 years! 

ie. If you "only" have 20% deposit, it can be VERY hard to get a positive* return, if less than 1%/m.

(Find a different market!?) All the best. Welcome to BP!...

* By "positive return", I mean positive cash flow - not accounting for supposed appreciation.

JD is correct and to tell you how I use the 1% rule if you can not make the 1% you will probably see the value of the properties go down in the future or rents will go up. When you look at areas that are under 1% you will notice there is a lot of building going on which eventually will bring rents and prices down as supply catches up with demand. There are always exemptions to the rule SF and NY and even there they can not stay exceptions for ever SF rents and prices are down huge year over year. what scares me is it sounds like you want to do the 1%rule but trying to talk your self out of it because you can not find anything that meets it that is almost always a bad idea. Good luck

Hello Matt,

              I am also in the Portland Market and in my opinion we are an overpriced market set for a correction in the next 1-3years.  By no means do I think it will be anything like the last crash, but I am finding it incredibly hard to find anything that hits the 1% rule or comes close.  I am currently stockpiling cash, lowering my liabilities and being patient. The Portland metro area saw a 12% increase in home prices from august 2015 to august 2016, August 2014-August  2015 we saw a 9.4% increase and 2013-2014 we saw an increase of 7%.  (all information taken from S&P CORELOGIC CASE-SHILLER HOME PRICE INDICES and calculated by Trevor Emmett).  

It is normally believed that 4% a year is a healthy growth rate, the average of 2013-2016 is 9.46%.  Also, we are currently at 2 months of inventory, which by all means is a sellers market.  Granted, I cannot predict the future and no matter what the market is doing: a good investment is a good investment (I just have not run across any as of late.)  Make sure you stick to your guns, have a plan and be patient!  and remember Warren Buffett's first two rules of investing :  

1.) do not lose money.

2.) DO NOT LOSE MONEY!

                       

 I hope that my two cents helped and either way best of luck!

I'm also a broker in Portland, specializing in multi-family.  Not to sound harsh, but it is next to impossible to find anything that hits the numbers you described above.  

The play in Portland at the moment is long term growth through appreciation.  Through the NEXT cycle.  Things will shift in Portland soon enough (Trevor is spot on above), so if you are buying now, you need to be planning for a dip in values and then wait for them to rise again.

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