1% Rule? 2% Rule? Help!

10 Replies

Are these two separate rules of thumb? Writers have opined on this forum before on this topic, but I remain confused. Rules are made to be broken, so how far do these rules extend?  Assuming they are different rules, when does each apply?  If they are the same rules, why are they differently named?  Thank you in advance. 

You won't be able to get 2% in all cases,  but you should aim for at least 1%.

Sometimes you have to go further out to get that 2% but it's certainly possible.  It really depends on the area.

The important thing is that the property cash flows.

Your best bet is to run the numbers using the calculator to see if it works or not.

These are really just "price to rent ratio" meaning how much you pay in (purchase + rehab) compared to how much rent you get.

Example:  If you're all into a property for $50,000 and you get $1000/month rent, this would be a "2% property".  If you're all in at $100,000 and you get $1,000/month rent, this would be a "1% property".

I would throw the rules out the window to be honest. To me, I would just run your numbers and see where you net out. Work backwards on the numbers and you should be fine.

Here is what you should be able to nail down:
1) If purchase and rehab = X, then what will your payment be based on your mortgage terms that you're going to get?
2) What are the taxes and insurance?
3) What will the rents be.

Rent minus PITI = Gross monthly profit.

Then figure in vacancy (typically 5%) and your repairs/maintenace/capex stuff. Then that will tell you what your net monthly profit will be.

The only tricky one of the bunch are the repairs/capex stuff. Very subjective. Some people say 100/mo. Some 150/mo.  I think 125 to 150 seems about right but I've only been doing it 7 or 8 years so not sure if thats enough for cap ex.  I can say my maintenance runs about 60/mo per property per month. But it all depends on the age of the homes, size of the homes, and the rehabs that you do......

Still, if you can get to gross monthly profit, then you should easily be able to get to Net. And its strictly up to you how much your net needs to be to do a deal.

For me, I stick to the gross profit number as my target. I'm averaging 450/mo gross per house. I figure 5% vacancy on my numbers but I've been running closer to 2 to 3% over the last 3 years (again, it depends on your homes and your rents).

So I'm comfortable assuming I should be making about 250 a month or so net. In reality, its been more like 300 to 325/mo net per house the last few years. And its definitely getting better and not worse. Partially, I think, because I've been adding a lot more houses in better areas later and my rehab finish is getting nicer and nicer. Less turnover = more profit...

For me, the rules are so useless, there's no point in even discussing them. Run the actual numbers on the house and then you'll know.

And when you do decide on that target gross monthly profit that equates to a deal, you may break your own rule anyway if its a house thats just really nice and would make for a fantastic rental.

The rules seems to depend on the area.  Both of the 1% and 2% rule seem to run in areas where there is little or no appreciation, especially the 2% rule.  The 1% rule is generally in areas where there is a little appreciation.  In high appreciation areas  such as the west coast states, New York City, Washington DC, Boston, and Florida you will be fortunate to break even.  

$1,000 rent in 2% rule area market will only pay $50,000 to possibly get that rent.

$1,000 rent in 1% rule area market will only pay $100,000 to possibly get that rent.

How sure do you want to be that you're collecting that rent?

These are called "rules" but they are guidelines. That being said, they don't necessarily mean anything. You have to evaluate the property, calculate expenses, and then see what the net income or net loss would be. As someone above mentioned, finding properties that meet these guidelines in high appreciation areas can be tough (but can be done). I am in SW Florida, and finding properties that rent for 1% of the purchase price is not easy, but they do appear. Don't let these guidelines stop you. Find a property, analyze it, and if the number work, do the deal. You can use them as a guideline in your head as a quick evaluation, but they won't give you a true picture of the property. You have to run the numbers and they will tell you to buy...or to pass on the deal.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

It's really simple.  1% is used when you want your milk to taste like water, 2% is used when you want to drink healthier milk.  It takes some getting used to, but once you do, going back to heavier milk tastes funny.

Other than that, it's a lazy way to guesstimate whether you have a good deal or not.  Every market is different in so many ways that using it as even a guideline can do more harm than good.

Bottom line, learn how to estimate rehab, analyze markets, and analyze deals on their own merits...and above all, never argue with the numbers.

Thank you so much, all of you for your great advice.  This is my first BP post, and it proved most helpful.  You are my first "mentors."  Should you have more thoughts, I'm quick to hear. 

Originally posted by @Joe Villeneuve :

It's really simple.  1% is used when you want your milk to taste like water, 2% is used when you want to drink healthier milk.  It takes some getting used to, but once you do, going back to heavier milk tastes funny.

Other than that, it's a lazy way to guesstimate whether you have a good deal or not.  Every market is different in so many ways that using it as even a guideline can do more harm than good.

Bottom line, learn how to estimate rehab, analyze markets, and analyze deals on their own merits...and above all, never argue with the numbers.

I'm drinking HALF & HALF Working on one that is pure cream! 

Originally posted by @Richard Dunlop :
Originally posted by @Joe Villeneuve:

It's really simple.  1% is used when you want your milk to taste like water, 2% is used when you want to drink healthier milk.  It takes some getting used to, but once you do, going back to heavier milk tastes funny.

Other than that, it's a lazy way to guesstimate whether you have a good deal or not.  Every market is different in so many ways that using it as even a guideline can do more harm than good.

Bottom line, learn how to estimate rehab, analyze markets, and analyze deals on their own merits...and above all, never argue with the numbers.

I'm drinking HALF & HALF Working on one that is pure cream! 

 Love it!!

Join the Largest Real Estate Investing Community

Basic membership is free, forever.