Rental property: less than 1%

21 Replies

New to the forum. We put an offer on a townhome in an area close to us and like the townhome area. There's 3 townhomes in each building. Our realtor gave us the average rents in the area and it would be closer to .7%. It will cash flow a little. Main question is what is the lowest percentage you will go for rental properties before you consider buying. We've had good appreciation in Raleigh so it's a very active market.

I would probably not buy anything less than 1 percent. Now a days I’ll probably only buy like 1.2-1.5 percent

@Donna Matessa A good Rule of Thumb is to not let these REI Rules of Thumb interfere with your analysis of a deal. Put pen to paper, see if the cash flow, appreciation, risk, reward all work for you or don't work for you. The 1% rule is just a spitball way to look at a deal on the surface very quickly. With townhomes, your due diligence should include checking on the financial stability of the HOA, and if the HOA covenants restrict rentals.

Originally posted by @Adam Schneider :

@Donna Matessa A good Rule of Thumb is to not let these REI Rules of Thumb interfere with your analysis of a deal. Put pen to paper, see if the cash flow, appreciation, risk, reward all work for you or don't work for you. The 1% rule is just a spitball way to look at a deal on the surface very quickly. With townhomes, your due diligence should include checking on the financial stability of the HOA, and if the HOA covenants restrict rentals.

People get way too tied up with "rules" and buzzwords ("does my property BRRR!??!") around here. If it looks like a rose and it smells like one too, then chances are that it's a rose. While opportunity costs can be a separate discussion, if you have a bird in the hand that hits all your specs, then it'd be silly to pass on it because of a pseudo-rule that someone else created.

As with most questions, it depends. My duplex cash flows at 0.92%. However, the tenants pay all utilities/snow removal/ lawn care. And, the roof is 3 years old, plus the seller installed new furnaces, hot water heaters, and ac units as part of sale. In other words, not quite the 1% rule, but hopefully little capital expenditures for a while.

Now, I’m searching for another multi unit. It’s in an area where Landlord usually pays water and sewage. And doubtful all new hvac again. So I’ll be needing at least 1.3% or more returns. Gotta run the numbers for every property and situation.

Good advice. The 1% is only to see if you’re close. (Some properties you look at will be a 0.3%, which you can quickly discard)

Do your analysis and see where things fall. Also cash flow is only one per of the equation. How does forced appreciation look? What’s the area going to do in the next 5 years?

@Donna Matessa , the reason why BP generally likes the "1% Rule" is that it's taken for granted that wise investors will always aim to use as much of other people's money (borrowings) as we can, and we know that most Lenders will lend out ~70% of properties' appraisal, if not more. 

ie. Why would anyone put more of their own cash into any property purchase than they have to?

Which means: How will properties that generate less than 1%/m gross return attain positive cash flow, when their expenses include around 50% of that revenue, plus the principal and interest repayments on 70%+ of their value?

Remember also: The fact that "We've had good appreciation" should come with a disclaimer (especially now) that says: "Past performance is not indicative of future results"! But, good luck...

I have never met a realtor trying to put together a deal that has been accurate in forecasting rents. They are always sunny day estimates. I would do my own research, especially when dealing with that margin.

Remember, some people have sat on a vacancy for a couple months to get “their rent #”.

Realtors know virtually nothing about investing . I’m sorry but that’s been my experience . They will often tout how great an investment property is and simply have no freakin clue as to what’s a deal or not . Better figure out the correct rent then go from there . As far as if it’s a good value or not .. I wouldn’t waste my time on anything that doesn’t produce atleast 2% . I don’t buy high end stuff in b neighborhoods though . A lot of people I know locally insist on getting at the very least 150$ per door after everything is paid out . If you can’t get that then it’s probably not worth the time and trouble to deal with imho

Originally posted by @Donna Matessa :

We will have positive cash flow, so that's good.  So other than rental comps realtor provided, where has everyone found comparable rents? 

Why will you have positive cash flow? If it's only because you're using all/mostly your own money to buy it, then let me just say: there are many ways to get a better return out of your savings, than mainly relying on unabated appreciation from now on. 

Or, do you believe we're not close to the top of the RE cycle? 

ie. What specifically will continue to drive appreciation for this townhome?...

K fairly new to this website but been investing for over 30 years. We have 60 rentals at the moment  are growing our portfolio should have close to 80 by year end but . . . Never heard of the 1% rule . So . . . I purchase a property for 50k put 20k in it for a rehab now its worth 100K. Please apply this rule to my scenario above.

THX

Originally posted by @Chris Youssi :

K fairly new to this website but been investing for over 30 years. We have 60 rentals at the moment  are growing our portfolio should have close to 80 by year end but . . . Never heard of the 1% rule . So . . . I purchase a property for 50k put 20k in it for a rehab now its worth 100K. Please apply this rule to my scenario above.

THX

Your scenario is an exact example of that Rule. ie. Worth $100k, but cost just $70k. ie. 70%!

Updated over 2 years ago

Edit: Oops, wrong Rule. The "1% Rule" suggests that you shouldn't settle for any less than a gross return of 1% per month (or more) of what it cost you, if you're expecting to ensure positive cash flow, even when fully mortgaged. [It's a separate debate as to whether 1%/m gross makes it a good investment. Lots of "depends"].

Originally posted by @Jason L. :
Originally posted by @Adam Schneider:

@Donna Matessa A good Rule of Thumb is to not let these REI Rules of Thumb interfere with your analysis of a deal. Put pen to paper, see if the cash flow, appreciation, risk, reward all work for you or don't work for you. The 1% rule is just a spitball way to look at a deal on the surface very quickly. With townhomes, your due diligence should include checking on the financial stability of the HOA, and if the HOA covenants restrict rentals.

People get way too tied up with "rules" and buzzwords ("does my property BRRR!??!") around here. If it looks like a rose and it smells like one too, then chances are that it's a rose. While opportunity costs can be a separate discussion, if you have a bird in the hand that hits all your specs, then it'd be silly to pass on it because of a pseudo-rule that someone else created.

People here get caught up in the number of doors they have... And some take leverage to the max. Talking replacing their job with 100/mo/door rentals

You should not use the 1% rule to justify or not a deal. It is a rule of thumb and nothing else. I have properties that are not 1% in Raleigh. Actually, in Raleigh, I would say it is difficult to get to the 1%, unless you go into less attractive areas. If you are investing in c or d neighborhoods, you will probably want better than 1%. But if you are in Raleigh and in good neighborhoods, I would think you will be hard pressed to get to 1%.

Brent Coombs - so just so I'm clear:

Edit: Oops, wrong Rule. The "1% Rule" suggests that you shouldn't settle for any less than a gross return of 1% per month (or more) of what it cost you, if you're expecting to ensure positive cash flow, even when fully mortgaged. [It's a separate debate as to whether 1%/m gross makes it a good investment. Lots of "depends"]

Under this scenario using my number of a cost of 70k using the 1% rule my rent should be $700 per month correct? If this is accurate I guess call my ignorant but why would anyone only attempt to get 1%? That seems very very low to me - we have 30 SFR with an average cost basis of 70k and we average $1140 /month - all but 2/3 are B props the others are C+

THX for your follow up

Originally posted by @Chris Youssi :

K fairly new to this website but been investing for over 30 years. We have 60 rentals at the moment  are growing our portfolio should have close to 80 by year end but . . . Never heard of the 1% rule . So . . . I purchase a property for 50k put 20k in it for a rehab now its worth 100K. Please apply this rule to my scenario above.

THX

 100k rents for 1k

But again this is a rule of thumb so your value of 100k drives the rent price. You'd exceed the 1% rule since your cost was 70k. Some people chase 2% but thats hard to find outside low income section 8

Originally posted by @Chris Youssi :

Brent Coombs - so just so I'm clear:

Edit: Oops, wrong Rule. The "1% Rule" suggests that you shouldn't settle for any less than a gross return of 1% per month (or more) of what it cost you, if you're expecting to ensure positive cash flow, even when fully mortgaged. [It's a separate debate as to whether 1%/m gross makes it a good investment. Lots of "depends"]

Under this scenario using my number of a cost of 70k using the 1% rule my rent should be $700 per month correct? If this is accurate I guess call my ignorant but why would anyone only attempt to get 1%? That seems very very low to me - we have 30 SFR with an average cost basis of 70k and we average $1140 /month - all but 2/3 are B props the others are C+

THX for your follow up

"Why would anyone only attempt to get 1%? That seems very very low to me"... Exactly!

[Hence my "separate debate" comment. But one answer is: "IRR"].

This from Investopedia: "You can think of Internal Rate of Return as the rate of growth a project is expected to generate"... [eg. SoCal. Rents less than 1%, but have been great investments!]