Updated almost 5 years ago on . Most recent reply
[Calc Review] 1% rule frustration
Hello!
I've been practicing my deal-analysis skills using the BP calculators. I'm looking for cash flow properties (duplexes in particular), just using Redfin to get a feel for the analysis process and what inventory might be available. Lots of my deals are losers (at asking price) and some seem to be "base-hits." But even the "base-hits" don't pass the 1% test. (ie 1% rule) So... am I underestimated expenses? Overestimating rent? A link to one example is below. Many thanks for any thoughts.
*This link comes directly from our calculators, based on information input by the member who posted.
Most Popular Reply
Hey @Matt Huber, welcome to BiggerPockets!
I appreciate your frustration with the "1% rule": You're wondering if the problem is with the market or the calculator itself.
And the answer is yes and yes!
With regard to market, the challenge is that it's very hard to get an expensive property to cashflow well as a rental, because rents generally don't scale at the same pace as price. For example, you might get $1K/mo for a $100K property, but you're not likely to get $6K for a $600K. This is essentially the "1% rule" and it's really less of a rule than an observation.
So, for your $600K duplex, unless you're getting $3K per side, you're likely not going to have a great cash-on-cash return. That is what the calculator is telling you.
That said, the BiggerPockets calculator is just a tool, and an imperfect one at that (see my detailed explanation/rant here: https://www.biggerpockets.com/...). It's only as good as the data you feed it, and it appears you've accepted the defaults suggested by the tool as TRUTH. They are not! They can't be.
Every property manager doesn't charge 8% in management fee. Every property is not going to have 5% vacancy, 5% CapEx, and 5% maintenance. As investors, it's our job to get the real input data so our analysis reflects reality as closely as practical. (For example, I don't know your market, but I'd be shocked if it only costs $960/year to insure a $600K property.)
That said, I applaud you for developing your deal analysis skills; keep it up and you'll gain the rare and priceless ability to construct high-quality deals!