Is the 1% rule a "must have" for a smart multifamily investment?

Question

Hi All,

First time posting, and really, new to RE investing.

Considering a multifamily investment (2 Units, 1/1 down, 2/1 Up) listed for $600k in a "B" location. Conservatively, expect property can rent for 3800/m. Based off the 1% rule, this property falls well below at .63% which based of the fundamentals of the 1% rule says this property will never be cash flow positive.

But when i do my own analysis, the property seems to make sense, clearing $745/m NOI. (analysis below)

I guess my question is, should I really be looking for "better" deals? My goal is not necessarily cash-flow, but rather building wealth over time. Cash flow obviously helps though.

Any thoughts or feedback is welcome. Just starting out in this and looking to learn (and not make a bad deal as my first :))

Upfront Cash Investment

$161,979

Dist. Cash Flow Per Year

$8,944

Dist. Cash Flow Per Month

$745

Dist. Cash Flow Per Unit / Month

$373

Cash-on-Cash Return

5.5%

5-Year IRR (not adjusted for taxes)

17.4%

Daniel Galmarini · Answer

I also didn't hit the 1% rule, but one side is able to cover the mortgage and property taxes. That works for me and my goals!

In my little experience, you'll know when you find a good deal. Research other deals and you begin to pick up on the average return in specific areas. Good luck!

Jonathan Ramos · Answer

@Rory Kelleher

The 1% is great for cashflow. Remember investing in real estate can come in different ways such as appreciation. So if you think the values in a specific are will go up the 1% rule may not apply as you are in it for long term gains.

I do a ton of work in Boston let me know if you need help.

Jramosrealtor.com

Bryan Noth · Answer

@Rory Kelleher the 1% rule really should be called the 1% guideline. It is also highly market dependent. Better cash flowing markets will tend have better rent to purchase price ratios. What are you seeing as a norm for your specific market, especially for the age of the property? And what market are you in? Someone local may be able to help provide more poignant insight as well

Beau Watson · Answer

@Rory Kelleher

I agree with the others. 1% is a great guideline but there are plenty of properties out there that can cash flow and be awesome investment that are below that. I love analyzing. Message me the address and I’ll help you analyze! Would love to see your numbers and what ya did and I’ll do the same!

Rory Kelleher · Answer

Thanks @Bryan Noth. In the Boston market and this property is north of Boston.

As I'm relatively new, I can't say I've analyzed enough deals to know he norm for the market. Spoke to a fellow early investor today and he advised the cashflow is still solid for the market, but his preference is to find places where he can add value and grow the worth of the property vs one that's all updated.

Appreciate your thoughts and input. Will have to sleep on this one.

Rory Kelleher · Answer

Also worth mentioning, though the house is old (build in 1900) there has been EXTENSIVE recent work put into the house. Completely new kitchen (stainless steel appliances, soft close cabinets, new countertops), new boilers, in unit washer dryer (new appliances), new roof 7 years ago. So alot of the major unforseen expenses categories seem to have been addressed.

Figured this context was useful.

Thanks again!

Figured this context was useful.

Thanks again!

Is the 1% rule a "must have" for a smart multifamily investment?

Is the 1% rule a "must have" for a smart multifamily investment?

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