Where are these 1% rule rentals???

Question

Hello all, first post here so be gentle haha.

I just retired from 20 years in the military and I'm looking at buying a property as a rental. I live in las cruces NM.

I currently have 4 houses. 3 rentals, plus the one I live in. My problem is I have always bought my houses to live in them first. They just turned into rentals after I got orders to move.

Now I am new to buying one as an investment. Investment properties seem to have higher loan rates etc... so they are more expensive. But everywhere I read, including here says to live by this rule. As a general rule of thumb, use the 1% rule as an investment strategy. The 1% rule states that the income property should rent for at least 1% of the purchase price to yield positive cash flow.

So a $100,000 house should rent for $1,000 a month. And that seems to be after loan costs and repairs are added in. I have been looking for houses for 3 months and I haven't found 1 that meets this criteria. The houses that cheap here are usually dumps or in bad areas. And they would only rent for $800 or so. The ones that would rent for 1200-1500 are $150-200k.

I mean, some articles said to be safe use a 2% rule. I wish!

So I am getting a little discouraged.

Is my market just weird? I mean the houses aren't that expensive here but the rents don't seem to match up.

Are these only foreclosures or auctions? Am I looking in the wrong place? Does this 1% rule only apply to fixer uppers?

Anyway, thanks for the help and I look forward to learning alot from all of you.

Bill B. · Answer

The 1% rule is for small towns and certain parts of the Midwest where you can buy a “decent” house for $50k. They still rent for $900-$1,000 and there you are 1-2%.

The rent as percent of sales price ALWAYS goes down. Nobody is going to $20k/mon to rent a $2million house long term. (Yes I know they do on short term rentals, but people also rent $400k houses for $20k short term some places...we’re talking regular yearly rentals.)

The “rule” as has been discussed a MILLION times, is not a rule, and was never was meant to be applied out of a small town in washington, or maybe other small towns. The same person who made the 1% rule also made the “$100/door cashflow rule” you’ll go bankrupt quick following that “rule”. For aome reason the people who mention one rule never talk about the other, from the same source.

I’d rather get .75% on a $500k house than 2% on a $20k house.

I don’t know if Las Cruces is like Vegas or Phoenix, but if so you have another major advantage. Stucco siding that last FOREVER, tile roofs that last FOREVER, no lawns, no snow, no thunderstorms, no tornadoes, low property taxes and no state income tax.

In MN they brag in the listing about any roof less than 8 years old, cause you’re going to spend $5-$10k on a roof every 10-20 years. You’re going to pay for lawn care, snow removal, paint and siding, higher property taxes, income taxes, etc etc.

just “ignore the ‘rules’ and carry on”.

Nathan Maier · Answer

Aaron, I want to offer a counterpoint to your statement here. Many new investors (myself included) get stuck in this mindset that they have to invest locally so that they can manage their own rentals to save the management fee. This can be extremely counterproductive. First of all, do you enjoy managing properties? Are you extremely good at it? Is the time spent managing your rental worth more than $100/month? For most investors, we do not enjoy being property managers. It is usually much more productive to pay a good property manager and spend that extra time doing what investors enjoy and are good at; finding the next deal and building relationships.

The second reason this is counterproductive reasoning, is that it forces you to stay in your local market, which may or may not be conducive to your goals. It sounds like your goal is cash flow. You aren't going to find much cash flow West of Missouri/Oklahoma. By freeing yourself from the mindset that you must self-manage, you open the doors to better markets that will better serve you in accomplishing your goals. There are markets where you will have better cash flow after paying for a property manager. Think about this. You can free yourself and your time from the burden of collecting rent, evictions, clogged toilets, etc and still have more cash flow if you allow yourself to think outside the box.

Brian Garlington · Answer

@Aaron Barber

First, thank you for your service.    1%-2% rule can be found in duplexes in "C" neighborhoods in Cleveland. I've acquired 4 of them in the last couple of years. You can also find them in Detroit and Milwaukee, but I don't have experience in those markets.

Account Closed · Answer

Your Comment "Hello all, first post here so be gentle haha.  just retired from 20 years in the military" First, thaks for your service.

Your retirement is just hours away investing in Phoenix. Take a look at the following spreadsheet and set up your investment properties like this

The model works well in Arizona and Texas where I invest but might be a bit harder to cash flow in California or any other high expense state. It also works well in the midwest. So, if you are intending on investing in CA or IL or WA you might want to look OOS to AZ TX OH MO or TN instead. It's a matter of economics.

Some people read spreadsheets to understand the numbers so you can look at the link and get the detail

Average Turnkey Cash Flow Per Door In Phoenix Metro Area No Bank Needed

https://www.biggerpockets.com/forums/600/topics/584916-average-cash-flow-per-door-in-phoenix-metro-area

Ali Boone · Answer

The (suck) reality is that most places won't hit the 1% rule these days. Certainly nothing the farther you go west. NM is probably included in that. Not to say good investments can't be found, but when cash flow is the focus, you have to be strategic.

The 1% and 2% rules used to be super-common and easy to find, but those years are past us until another downturn or crash.

Do you definitely want to a property local to you or are you willing to invest long-distance?

Stuart Grazier · Answer

@Aaron Barber First, thank you for your service and congrats on retirement. I am three years away from retirement myself and really looking forward to it! I'd recommend looking at properties out of state. Places in the midwest and southeast have a better chance of getting the 1% rule. We have started buying and selling rental property in Milwaukee, WI and can easily find great rentals in good areas of town that hit the 1% rule. In fact, we won't sell anything to any of our investors if they don't meet the 1% rule. Let me know if I can help in any way. Good luck!

Colin Douthit · Answer

@Aaron Barber we help to source single family homes here in the Kansas City market for out of state investors.  We can find 1% rule houses regularly.  One that we just sent out this morning was a $78,000 house that would rent for $900.  If you are up for investing out of state hit me up.

Wes Blackwell · Answer

@Aaron Barber

ROI is all relative. Can't get the 1% rule on a $400k house in California, because the loan to purchase that property with only 5% down is $1,200 less per month, so why would anyone pay that much in rent when they could buy it for way cheaper.

Ultimately, take a look at what ROI the average property offers in any given market, and then when something performs better than that you may be looking at a "deal" for that market.

For example, if the average 1% rule score near you is 0.6%, then a property that offers 0.8-0.9% is probably a deal comparatively even though it doesn't hit the 1% mark.

James Wise · Answer

They are all over the Midwest. Cleveland, Toledo, Birmingham, Kansas City, Indy, Detroit etc.....You'll actually see stuff approaching 2% in those markets. This is why 99% of all turnkey companies operate in the Midwest.

Theresa Harris · Answer

Find a place where most of your expenses are covered.  While you shouldn't bank on appreciation, are housing prices going up in the area?

I would not buy a place in a rough area or town.  Yes get something that might need some work and you can add value, but you also have to think about resale and the type of people you will have as tenants.  Buy something in a solid area.

Where are these 1% rule rentals???

Most Popular Reply