Analyzing deals, 1 percent rule and 50% no longer relevant?

Question

Hello everyone I am looking to purchase my first rental property and I have analyzed many deals. What rules are you guys using to measure if the deal is a winner or not? I have been trying to use 1% rule and 50% rule, and the BP calculator, without a massive down payment I can't get a property to cash flow more than 100 dollars. I have a hard time justifying a loan for $200,000 to cashflow $100 a month. Is there a different metric or rule I should use to gauge if a property is a good investment? Also are these rules no longer relevant?

thanks in advance!

Jeremy Horton · Answer

I hate to do this - but this is such a common question on this forum.

Yes the rules are great screening metrics. Yes, IMO, they are still relevant.

99% of houses, especially on the MLS, don't make good rentals (seems you are on your way to figuring this out). You'll generally need a pretty big rehab to make a SFH cash flow well.

I use my own income/expense excel sheet to analyze properties. My suggestion would be to make one - if you can't make a simple cash flow calculator then you don't understand what you are doing (and probably shouldn't be doing it). Making a calculator would be a good learning thing to do.

Now go watch "4 Square Method" on youtube by bigger pockets. Very simple illustration/calculation on income/expenses/cashflow.

Greg R. · Answer

The main metric I look at is COC. You'll hear some investors say that you don't find good deals, you make them. Look for value add. Perhaps somewhere where you can turn that $100 a month cash flow into $500 or $1,000 with a little work and some creativity. Look for properties in highly desirable areas that are likely to achieve high levels of appreciation.

Don't get too hung up on all the "rules".

Conner Olsen · Answer

CoC and total cashflow is better to look at. Try reverse engineering the '1% rule'. Find out what the average rent-to-price ratio you are seeing in your market. Let's say it's 0.8%. When you see a property that is at 0.85% you know that this might be a good deal and you should analyze it further. The 1% rule was created when real estate was at the bottom, not when we had 50% appreciation in 24 months and interest rates doubled following that appreciation.

If you want more cash flow, rent properties creatively. Look into rent-by-the-room, STR, or MTR (my personal strategy). I took a property that was at 0.55% and turned it into 1.33%.

Chris Webb · Answer

Hi @Scout Askren, as some have said, I use CoC return as my metric. Basically, this metric tells me how hard my money is working. Look up "InvestLYH" on YouTube to see how the back-of-the-envelope calculation works. Always confirm your calculations with a Property Manager, Realtor, and Loan Officer. In my area there are some fine rentals right out of the MLS, however, if you can add value, it will increase your yield tremendously.

Caleb Brown · Answer

You have to run numbers see where the ROI is. Nicer areas have lower returns and vice versa. It might take adjusting your search or being okay with lower cashflow at the start. Some investors look at 2-5 year forecast of the property. If you plan to hold you most likely won't sell sooner than 2 years unless something pops up. Also find ways to add value or make a decent deal great. In this market you can get more aggressive with offers to help. Happy to chat I work in KC and STL

Bjorn Ahlblad · Answer

If you haven't already, attend a couple of podcasts on underwriting. There are some good ones here and on youtube. Where you get your numbers is critical and they are not in the listing or proforma.

What @Greg R.said above is so spot on especially in today's market.

Analyzing deals, 1 percent rule and 50% no longer relevant?

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