When I was working with a mentor a few years ago, he told me about a 1% rule. If the rent is 1% or more of asking price, it’s a deal. Has that changed to 2%?
Monica, it's a principle, not a true rule. What constitutes a deal is a transaction that performs up to your minimum criteria. You're obviously looking at buy and hold opportunities. Use the Bigger Pockets calculator for Rental property. There are also tons of worksheets posted in the Resources section that will help you evaluate deals.
Basically, the 1% rule is supposed to represent a deal that will provide a minimum accepted cash flow. However, it isn't applicable in all scenarios. You may be making a play on property with a longer term return in mind. Set your own minimums and then work the numbers to figure out whether a particular "deal" is a deal for you.
I have been very basically using the rental calculator but don’t quite get the financial element because I am doing owner financing, and i’m Not sure how to put that into the form.
If the rent is 1% or more of asking price, it’s a deal.
@Monica Litster actually it is probably better stated that, if the rent is not at least 1% of the price it is NOT a deal.
It is basically a quick screening test. It is something you can do in your head easily and know immediately if it is close to your criteria. If it meets the test then you can look into it more closely. I prefer the 1% Test as opposed to 1% Rule
The actual number you use 1% or 2% or some other number depends on your market and goals. Expensive markets or markets where you expect most profits to come from appreciation then 1% may be to high. In my market 2% is too low for me. Figure out what works for you in your market then use it a a first crude screening tool not a decision maker.
i don't use the financial calculator here but just inclulde your terms with the owner where you would input terms with the bank or other lender.
There should be a disclaimer.
1% rule is fine in certain areas and a waste of time in others.
Many thanks!! Clearer now.
It's a general "rule of thumb" used to quickly evaluate properties and determine whether they warrant further investigation. The actual percent is market dependent.
In my market, it's rare to find a property that meets the 1% rule. Most properties are in the 0.7% - 0.8% range. If I see a property for $200,000 that can produce $2,000 income, I start digging in because I know it's going to be a winner (if the numbers are accurate).
Some markets, like Cleveland, may need a higher "rule of thumb" like 1.5% or 2% to find the real diamonds.
The 1% rule is very important to me-gotta hit that, and in this seller's market it can be a challenge no matter if you are looking for SFR or apartment buildings. I don't consider future appreciation much my reason for buying rental properties is to supplement my retirement income, so that means it has to cashflow generously which means the 1% rule or better.
Appreciation is all about timing and many properties have appreciated strongly over the past few years, however if people did some research they might find the property was worth about the same in 2006 as it is today; so timing and cyclical.
I have had a few multi fam come across my desk over the past week that meet the 1% or better, but as soon as I add in my $200 per door per month and Mgmt, because I don’t want to manage, the deals don’t even remotely work. And I have been told that $200 per door per month is an acceptable/reasonable amount.Thoughts?
What is the cost per door you are referring to?
I’ve always tried to do the 1% rule but 2% seems impossible. What am I missing here?