Does the 1% rule still apply in today’s market?

Question

I’ve been working on getting into my first rental property in the DFW market. As i analyze deals, it seems almost impossible to reach even the 1% rule because rents hardly cover PITI (more like the -1% rule). Is the 1% rule a thing of the “old economy” with low interest rates or am I just looking in the wrong markets for cashflow and should be looking for appreciation instead. My question is, should I still be looking for this kind of deal that meets the rule (as a guideline) or should I buy to breakeven today so that “one-day” when equity gets paid down and rents go up I’ll eventually cashflow, OR should I wait until cashflow is better all together when it makes sense to buy? Let me know your thoughts!!

Rick Pozos · Answer

1% is still a rough estimate to purchase. BUT you will not find a clean, beautiful, ready to go property at the 1%. You have to buy at a dicount from someone who NEEDS to get out of their property. This is where your direct marketing comes into play. Realtors are pretty bright folks. They are not going to list a property at 40% below market to sell it fast. They might go 5% or 10% below market if it needs some flooring or needs new appliances.

You have to source the deals yourself!!! It takes lots of work and talking with lots of people to find the deals. YES, they are out there. I close about 1 every other month right now. Hopefully next year I will buy 2 or 3 every month.

Moe Sidd · Answer

@Jesse Paxton, I think with enough leverage the 1% rule won't cash flow here in DFW and probably hasn't in a while. Like you mentioned high interest rates, PITI, low rents, taxes, etc. make this nearly impossible.

The 1% rule still works in the sense that you could buy a $100k condo and rent it for $1000/month, but does it cash flow is a whole different conversation.

My advice is to stick to Dallas for long-term buy-and-hold appreciation, head to the Midwest for solid cash flow (Ohio, Michigan). Also, if you're going to invest in Dallas, have as little leverage as possible, as it'll eat up any cash flow.

Dean Harris · Answer

I source 1% Rule deals all the time ofr my client sin Memphis, TN!

PM me and I can answer any questions you may have!

Rebecca Graziano · Answer

Cash flow is next to impossible right now in DFW. Unless you look for an assumable loan or seller financing, forget it. The property taxes and insurance rates will eat any profit you projected, assuming you don't have an HOA. Many listings are dropping price, or just sitting on the market, but it's still an overall bad market as an investor. Forget looking for multifamily. Condo HOAs are sky-high, but wages cannot keep up. It doesn't take a genius to know this isn't sustainable.

Dean Harris · Answer

@Jesse Paxton

Welcome to BP! I source 1% deals frequently! I have a 1% deal in 38116 for $175,000 and it will rent for $1800. I see these frequently.

I also host a weekly podcast where I discuss the 1% Rule properties and how to make those work along with how to invest in Memphis, TN. You can find it by searching Investors Guide to Memphis Real Estate wherever you listen to podcasts. You can also watch us on YouTube.

Drew Sygit · Answer

@Jesse Paxton

The Real Estate Crash of 2008-2010 caused real estate prices to crash across the country - but didn't affect rent amounts. This caused a historically unique opportunity for investors - they could buy Class A properties and immediately cashflow when renting them out.

This couldn't last forever, and it didn't, as excited new investors drove up prices.

Eventually, Class A property values increased to the point that even increasing rents didn't allow them to cashflow upon purchase.

So, the flood of new investors switched to buying Class B properties.

COVID created a chaotic spike in both the sale & rental markets, attracting even more new real estate investors. According to CoreLogic, in December of 2023, almost 30% of home sales were to investors!

Investment also spiked in Class A Short-Term Rentals (STR) and investors started paying higher and higher prices based upon anticipated STR rental rates, that exceeded sustainability based upon Long-Term Rental rates (LTR).

Now we're seeing investors pouring money into buying Class C rentals - but, many are getting burned.

In our experience & opinion, the main determinant of property Class is not location or even property condition, those are #2 and #3. The #1 determinant is the Tenant Pool.

If you don't believe us, try putting several Class D tenants in Class A apartment buildings and watch what happens. Or try the reverse - rehab a property in a Class D area to Class A standards and try to get a Class A or B tenant to rent it.

Unfortunately, many newbie real estate investors are jumping into buying affordable Class C rentals - expecting Class A results.

In our opinion, Class C tenants have FICO scores from 560 to 620 - where their chance of default/nonpayment is 15-22%. See the chart from Fair Isaac Company (FICO) below:

FICO Score

Pct of Population

Default Probability

800 or more

13.00%

1.00%

750-799

27.00%

1.00%

700-749

18.00%

4.40%

650-699

15.00%

8.90%

600-649

12.00%

15.80%

550-599

8.00%

22.50%

500-549

5.00%

28.40%

Less than 499

2.00%

41.00%

Source: Fair Isaac Company

According to this chart, investors should use corresponding vacancy + tenant-nonperformance factors of approximately 5% for Class A rentals, 10% for Class B and 20% for Class C.

To address Class C payment challenges, many industry "experts" are now selling programs to newbie investors about how Section 8 tenants are the cure. If only it was that easy. Yes, the government pays the Section 8 rent timely, but more and more tenants are having to pay a portion of their rent. Then there are the challenges with Section 8 tenants paying utilities and taking care of their rental property.

Investors should fully understand that Section 8 is not a cure-all for Class C & D tenant challenges, it's just trading one set of problems for another.

We see too many investors not doing enough research to fully understand all this and making naïve investing decisions.

Once you understand the above, you still need to find a property. You’ll have to do what investors did before the Great Real Estate Crash:

• Evaluating 100 properties, to identify 10 to make offers on, in the hopes one seller accepts.
- Yes, this takes a lot of work!
• Network with wholesalers who can bring you “deals”
- Many wholesalers are also newbies who have no clue what a real deal is and are just time-wasters.
NOTE: We often see wholesalers re-marketing MLS properties at HIGHER amounts!
• Start using your own personal network to find motivated sellers. 
- Start posting on your favorite social media site what you are looking for – not once or twice, but CONSISTENTLY for 6 months! Give updates on properties you’ve looked at or analyzed to keep your audience engaged, so when they stumble upon a potential situation, you are the first one they think of.

Good luck!

Terrance Hill · Answer

Great question, Jesse — a lot of us are wrestling with this right now. Some investors are shifting to markets where numbers still work for cash flow, while others are playing the long game with breakeven properties in high-growth areas, banking on appreciation and rent increases.

I think it really comes down to your strategy: do you want immediate cash flow, or are you okay trading that for location and long-term equity growth?

Diego Alvarado · Answer

Hi @Jesse PaxtonThe 1% rule is often a hot topic. As mentioned in a few BiggerPockets podcasts that were recently released, this rule is a simple guideline to help you quickly gauge a potential deal.

Here's a breakdown of the key takeaways from those discussions:

- The 1% rule is a starting point. It's a quick way to screen for deals that are likely to be profitable. Don't be discouraged if a deal doesn't meet the 1% rule; most properties don't.

- Finding 1% deals is still possible, but it requires a solid strategy. These types of properties are harder to find in today's market and often require a lot of experience.

- The most important metrics are cash flow, cash-on-cash return, and appreciation. These three metrics are what truly determine the success of your investment. Your investment goals will determine which of these metrics is most important to you.

Remember, a successful real estate investment is based on a solid understanding of the numbers and a clear strategy for what you want to achieve.

Aaron Zimmerman · Answer

1% rule is extremely tough in todays market. To get 1% rule, you'd need to do a combination of short term rentals, medium term rentals, or rent by the room to amplify cash flow.

Neil Jenkins · Answer

There's always a way to make $ in real estate with rentals. It's about being creative. I can help you cash flow if that's your end goal.

Ultimately it comes down to increasing your financial intelligence and seeing opportunities in a property others miss

Let me know if you'd like some tips

Does the 1% rule still apply in today’s market?

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