Will the 1% rule always exist?

Question

whether it's a sfh or a mfh will the 1%rule always exist? I mean you need to buy property no less than 150k to get the 1% rule, and as inflation occurs property values rise. I'm just wondering say in 20-30 years will the 1% rule exist in the U.S? For instance in Los Angeles it is very difficult to get the 1% rule because property prices are so high and rents are low. In Houston Texas lets say 20-30years from now the prices might be similar to the Los angeles area and the 1%rule might not exist.

Dean Letfus · Answer

There is actually no such thing it's just an idea someone coined.  You have to look at what is a good yield in your chosen market and develop your own rules from there.

Richard C. · Answer

7) Interest rates.

That is what determines the value of real estate investments, more than just about any factor.  Let me make 7% in a T-bill, and there is no way you will catch me messing with rentals for 10%.

Kumar Paj · Answer

Simple answer is 'NO'. It does not always exist and I don't think a smart investor should blindly follow that rule. I usually keep the following factors in mind while following the 1% Rule as well as 50% rule.

1) Neighborhood/location, 2) Purchase price 3) Property Tax 4) Appreciation rate 5) Vacancy rate 6) Rent increase rate

Joshua McGinnis · Answer

Hi @John Carter Welcome to BP.

The 1% rule is just one of many guidelines for evaluating a potential investment deal. Obviously, there are other techniques and strategies vary based on the investor, the market, and other external factors.

I would say that in general, yes, the 1% would still exist 20-30 yrs from now in certain markets where demand for rentals outpaces peoples' willingness and ability to be homeowners AND there is adequate housing supply.

Los Angeles has all but the last component which is adequate housing supply. This drives home values higher and makes it more difficult to meet the 1% rule. The high home prices are also a function of demand and peoples' ability to be homeowners (which is high here in SoCal).

In a place like Memphis or Houston or other cash-flow markets, there is less demand for home ownership. This increases the demand for rentals which in turn drives up market rent but keeps property values lower. Those markets also have a lot more vacant land to increase supply over the long-run, providing yet another means to keep providing supply in the market (which keeps prices down) - something which Los Angeles does not have.

For the 1% to go away, it would mean people's ability to purchase homes (get financing, have the income, have the downpayment, etc) increases with their demand to be homeowners. Without some significant govt intervention and improvements to the economy across much of the U.S., I don't see that happening anytime soon.

Joe Villeneuve · Answer

Bingo!!!!   It sounds good.  What it does, is make investors lazy.  Instead of actually analyzing a deal on it's merits, an investor analyzes a deal based on a "one size fits all" criteria.  Nothing in life works that simple.

Larry Turowski · Answer

@John Carter Deals will always exist.  That is the important thing.  The 1% rule is just a tool to evaluate potential deals.

Francis A. · Answer

@Joshua McGinnis

In a place like Memphis or Houston or other cash-flow markets, there is less demand for home ownership.

** Very interesting point. In your estimation, what would you say are the top 2 or 3 reasons for "less demand for home ownership"? I am curious to see if mid west towns like Minneapolis/St Paul fits into this category. Thanks!

Brent Seehusen · Answer

There are plenty of properties that meet the 1% rule in LA, as well as the other surrounding counties.  You just need to put in the effort to find them.  Near the bottom of the housing market you could find these properties in pretty good areas, now they might be located in less desirable areas.  If it feels like 1% will disappear forever, it's only because we have experienced a rapid increase in prices.  Believe me, LA investors in 2004-2006 were thinking 1% was gone forever also.  Yet values came back down to earth.  The housing market will tank again probably sooner than most people think, and there will be an abundance of great deals again in the not-too-distant future.  The LA housing market has had a down market on average every 11 years since WW2 and that's not likely to change.

Susan Velasquez · Answer

i think the 1% rule or 2% rule for that matter will continue to exist. maybe not in texas eventually but somewhere else like in the case now. where property prices increase in one area , these remain stable or decreases in other states. same with property taxes.

Joe Villeneuve · Answer

I'm with @Kumar Paj on this one.  The 1%, 2%, 50%, etc...rules are for when you invest in milk.  If you're investing in RE, use real numbers from the actual property.  It isn't that hard.

Will the 1% rule always exist?

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