1% "Rule" Still Valid in Texas?

Member since 2023 · 23 posts · 12 votes

I am trying to do initial filtering with 1% rule or test in Texas and virtually nothing meets it. Anyone else discovering this as well.. how are you buying investment properties right now especially with current interest rates that cash flow?

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Polo VazquezPro Member

Real Estate Agent · McAllen, TX · Member since 2017 · 382 posts · 281 votes

I would suggest you stop looking at the big cities. Look in the smaller towns in Texas. I just saw one that meets the 1% rule in Kilgore. I see some that come close all the time in my market as well. I never see it on big cities like San Antonio, DFW or Houston and much less Austin.

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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
3y
@Account Closed, It sounds like you are at least trying to use the 1% rule correctly. So, you are on the right track!
The 1% rule is best use to filter properties so that you focus on ones that have a reasonable potential to cash-flow. Its a time saver.
So, you are finding that at full asking price very few properties are 1% properties and I'm sure that is common in many markets. I would loosen the criteria a little and look at properties that are .9% or .8% BECAUSE a deal isn't what a seller offers its what YOU make of it!
For example, you might see a duplex advertised at $200k with rents of $1800 (aka .9%). Looking at the listing casually you might see that rents are $300 under market and furthermore with some cosmetic upgrades could go up an additional $300. That means even if you paid full asking price of $200k that after a light rehab you would expect $2400 in rents or 1.2% which in many markets is good.
If you can see a deal in your head at 1% or greater then its worth diving deeper to analyze it. So, if I saw a listing as I just described I would start plugging in numbers because taxes, utilities, etc all vary. So, even though it meets 1% doesn't mean its a "good deal".
On the flip side if you see a .9% listing where the place looks completely maximized you can just ignore the listing unless you feel you can negotiate a lower price.
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
3y
@Kevin Sobilo Agreed and that's why we focus on distressed deals. It's nearly impossible to find properties that pencil out for renting at full market value. It's just a bad time to build a rental portfolio.
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Account Closed
OP
Member since 2023 · 23 posts · 12 votes
3y
Quote from @Kevin Sobilo:

@Account Closed, It sounds like you are at least trying to use the 1% rule correctly. So, you are on the right track!
The 1% rule is best use to filter properties so that you focus on ones that have a reasonable potential to cash-flow. Its a time saver.
So, you are finding that at full asking price very few properties are 1% properties and I'm sure that is common in many markets. I would loosen the criteria a little and look at properties that are .9% or .8% BECAUSE a deal isn't what a seller offers its what YOU make of it!
For example, you might see a duplex advertised at $200k with rents of $1800 (aka .9%). Looking at the listing casually you might see that rents are $300 under market and furthermore with some cosmetic upgrades could go up an additional $300. That means even if you paid full asking price of $200k that after a light rehab you would expect $2400 in rents or 1.2% which in many markets is good.
If you can see a deal in your head at 1% or greater then its worth diving deeper to analyze it. So, if I saw a listing as I just described I would start plugging in numbers because taxes, utilities, etc all vary. So, even though it meets 1% doesn't mean its a "good deal".
On the flip side if you see a .9% listing where the place looks completely maximized you can just ignore the listing unless you feel you can negotiate a lower price.
Thank you! Great insight
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Robert Finn
Realtor · San Antonio, TX · Member since 2021 · 150 posts · 107 votes
3y
I'm looking at small multifamily that have had longer days on market with an opportunity to value add. If you can include good terms within the offer (quicker close, shorter inspection period, pay closing fees, etc.) you may be able to get the purchase price much lower depending on the seller situation. Also consider multiple strategies (short term, mid term) on one unit and LTR the other. I'm currently using that strategy and have been exceeding the 1% rule consistently.
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Account Closed
OP
Member since 2023 · 23 posts · 12 votes
3y
Quote from @Robert Finn:

I'm looking at small multifamily that have had longer days on market with an opportunity to value add. If you can include good terms within the offer (quicker close, shorter inspection period, pay closing fees, etc.) you may be able to get the purchase price much lower depending on the seller situation. Also consider multiple strategies (short term, mid term) on one unit and LTR the other. I'm currently using that strategy and have been exceeding the 1% rule consistently.

Thanks! Are you self managing these properties?
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Robert Finn
Realtor · San Antonio, TX · Member since 2021 · 150 posts · 107 votes
3y
@Account Closed yes, PM fees are in the 25% range here in San Antonio for STRs. Self managing is a must for me.
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
You won't find the 1% rule, and when you do it's most likely a piece of junk. Remove the 1% rule from your calculations, there are so many more ways to analyze property.
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Account Closed
OP
Member since 2023 · 23 posts · 12 votes
3y
Quote from @Eliott Elias:

You won't find the 1% rule, and when you do it's most likely a piece of junk. Remove the 1% rule from your calculations, there are so many more ways to analyze property.
That is what I’ve been seeing so far- what other way do you recommend for filtering through 100s of properties before doing a full analysis on specific ones.
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Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
3y
@Account Closed
While the 1 percent rule may have served well as a screening tool in the past, it’s not helpful in the current moment, of home values soaring at unprecedented rates and interest rates still near the lowest in history.

“There are legacy screening metrics that worked very well 20 years ago,” says Thomas Stepp, Mynd Management’s director of investment services. “This rule helped the investor to know that rent on a property would cover expenses and let them put some money aside. In a higher interest rate environment, the 1 percent rule makes sense.

“But when interest rates are lower, and you see price and rent appreciation outpacing inflation, finding quality within that rule is highly unlikely.”

Properties that would cost an investor only $200,000 but would command $2,000 in rent “just don’t exist,” says Stepp. “The market isn’t trading that way anymore.”

As an example, the median home price for a single-family home in Austin in 2019 was $335,095. For that price, an investor would have to charge about $3,350 in rent to meet the 1 percent rule. But the median rent at that moment was about $1,550, so the investor following the 1 percent rule would have looked elsewhere.
Similarly, smart real estate investors may now look at an area where rents are modest but where population and employment are forecast to grow, which will drive demand for housing, and see a promising investment.
All the best!
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Lucia Rushton
Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
3y
@Katheryn Busch unfortunately the 1% rule was created in a vastly different market. While I use the calculation as a guidance it cannot be your only factor for evaluation.
Texas and DFW in particular is a very strong market.
Lastly deals are not falling off the tree, one must create them.
Reach out if you have any questions or just want to discuss the market.
Best wishes
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Conner Olsen
Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes
3y
Quote from @Account Closed:

I am trying to do initial filtering with 1% rule or test in Texas and virtually nothing meets it. Anyone else discovering this as well.. how are you buying investment properties right now especially with current interest rates that cash flow?

If you are analyzing a market, figure out what a good rent/price ratio is that hits your cash flow goals. I would analyze 20 deals, look at the top 2, find out their rent/price ratio, and use that as a benchmark. The 1% rule was created after the last crash when prices were 50% lower and interest rates were 3%, it's not applicable anymore in the majority of markets. In Austin 2 years ago 0.65% was a great rent/price ratio and hit my investing goals so when I came across a 0.7% deal I knew I needed to act fast.
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Account Closed
Louisville, KY · Member since 2023 · 70 posts · 34 votes
3y
The '1% rule' depends on interest rates in specific market conditions. Don't depend on any one metric too heavily. Rate change, operating expenses changes, prices change so must an 'rule'. Best to get extremely well versed in the math of real estate vs being dependent on one specific algorithm.
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Michael Le Blanc
New to Real Estate · Los Angeles · Member since 2021 · 9 posts · 1 vote
3y
Thanks for posting @katheryn busch! My question is "Is the 1% rule valid ANYWHERE?!"
As a rookie investor, based in L.A., I've been looking for deals in various cities and not finding anything hitting 1% (or even cash flowing really). I will try "lowering the bar" to consider .8 and .9% options.

So far I've looked in Memphis, Columbus and San Antonio but curious if there are any markets that might have more favorable appreciation to help offset some of the reduced cash flow?

Thanks!
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Ryan KellyBusiness Member
Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
3y
The rent-to-purchase price ratio is a good tool to help evaluate markets and to compare properties to one another. Don't get stuck on the number 1%. Think of the ratio as a tool for evaluation. As others have said, most markets don't have a lot of 1% ratio properties lying around and easy to find. Instead, it's simply a barometer of each market to see how they are stacking up. Keep up the hunt!
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Travis Reed
Member since 2019 · 40 posts · 22 votes
3y
I find 1% here in texas but they tend to be in smaller towns and class C style properties. These will cash flow good but likely not appreciate like the urban areas/outskirts. As others have said, with current interest rates it will be tough unless some property values drop. IN my imagination, multifamily will drop first since they are valued based on cash returns.
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Adah N.
Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
3y
Quote from @Travis Reed:

I find 1% here in texas but they tend to be in smaller towns and class C style properties. These will cash flow good but likely not appreciate like the urban areas/outskirts. As others have said, with current interest rates it will be tough unless some property values drop. IN my imagination, multifamily will drop first since they are valued based on cash returns.
I don't think 2-4 unit multifamily will drop as they are the ones likely to cash flow. Lots of competition to buy 2-4 Multi right now, since it is next to impossible to find SFR that will cashflow at least on the MLS.

Because of high interest rates, anyone looking for cashflow absolutely needs to use the 1% rule to filter through properties.
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Albert Hasson
Investor · Paradise Valley, AZ · Member since 2012 · 361 posts · 214 votes
3y
I remember when it was the 2% rule!!
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Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
3y
1% rule many times means that they're rough properties in bad areas too. They may look good on paper but may be a nightmare to manage and not appreciate well. I would fully analyze a few properties and figure out what % rule works in areas that meet your goals. Maybe it is 1%, but maybe its .8%. I think of the 1% rule similar to cap rates anymore. If I see a 2% rule deal I know it's probably fraught with risk and going to be a nightmare to manage because it's in the ghetto.
If you see a 10 cap apartment building it's typically the same story.
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Joel Broyles
Real Estate Broker · Member since 2023 · 41 posts · 37 votes
3y
If you can find a property that pencils out at 1%, you're going to do a lot of rehab to get it there and the area will be subpar. But, like a lot of others have suggested, it's a somewhat stale metric these days.
I'm seeing it closer to 0.75-0.8 and most folks are pretty happy with that considering the HPA you get in Texas. I also think investors focus far too much on year 1 for a 10+ year investment. Look at the deal in year 5 assuming conservative, historical rent growth. You can still get to 1% with rent increases over long period, but you might not get it in year 1. If you own it for 20 years, would you be happy to have it at 1%+ for 15 of those or would you pass because you didn't get it for all 20 years? Factor in price appreciation and look at the whole picture. Texas is very strong long term.
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Travis Reed
Member since 2019 · 40 posts · 22 votes
3y
Quote from @Adah N.:

Quote from @Travis Reed:

I find 1% here in texas but they tend to be in smaller towns and class C style properties. These will cash flow good but likely not appreciate like the urban areas/outskirts. As others have said, with current interest rates it will be tough unless some property values drop. IN my imagination, multifamily will drop first since they are valued based on cash returns.
I don't think 2-4 unit multifamily will drop as they are the ones likely to cash flow. Lots of competition to buy 2-4 Multi right now, since it is next to impossible to find SFR that will cashflow at least on the MLS.

Because of high interest rates, anyone looking for cashflow absolutely needs to use the 1% rule to filter through properties.

I understand your reasoning but my reasoning is that multifamily and commercial are valued based on cap rates and returns. Cap rates are lower than interest rates right now which means commercial and multifamily values will be dropping. 5-6% cap rates will not be sticking around. In other words, investment properties are not going to be offering good returns so values will begin to drop as properties sit. I have already watched commercial property in my area drop their askings prices to raise their advertised cap rates. Multifamily may not be commercial but it is valued the same, based on returns. No one will buy a multifamily property that doesn't have a good projected return, meanwhile SFH values are not driven by cap rates, returns, cash flows, etc. Almost all based on the market, demand, economy, etc. So plenty of people will still be buying those, regardless of their return.
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John MorganPro Member
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
3y
I’m ok with .75% or .8% in the DFW area.
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Polo VazquezPro Member
Real Estate Agent · McAllen, TX · Member since 2017 · 382 posts · 281 votes
3y
I would suggest you stop looking at the big cities. Look in the smaller towns in Texas. I just saw one that meets the 1% rule in Kilgore. I see some that come close all the time in my market as well. I never see it on big cities like San Antonio, DFW or Houston and much less Austin.
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Tyler DeVerse
Rental Property Investor · San Antonio · Member since 2019 · 6 posts · 5 votes
3y
In San Antonio Ive hit the 1% rule exactly on both of my MLS purchased duplexes after I did some improvements (paint, flooring, updating EL/PL fixtures) and raised rents with great cashflow I dont see the 1% rule being possible if you plan to go with single family homes at least here in San Antonio.
Best of Luck!
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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
3y
Quote from @Account Closed:

I am trying to do initial filtering with 1% rule or test in Texas and virtually nothing meets it. Anyone else discovering this as well.. how are you buying investment properties right now especially with current interest rates that cash flow?

I just bought a bunch of properties in an A- area (Museum district of Houston). I paid $67k/door. Avg rents are $850/month.

The reason it's hard to find 1% properties are people keep overpaying. I won't even pay the '1% rule' if they're in a trash area. Plenty of bad areas have $750/month rents. I'm not paying $75k/door for them.

IMO 1% is the TOP of what you should pay -- and only if it's in a good area.
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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
3y
Quote from @Conner Olsen:

Quote from @Account Closed:

I am trying to do initial filtering with 1% rule or test in Texas and virtually nothing meets it. Anyone else discovering this as well.. how are you buying investment properties right now especially with current interest rates that cash flow?

If you are analyzing a market, figure out what a good rent/price ratio is that hits your cash flow goals. I would analyze 20 deals, look at the top 2, find out their rent/price ratio, and use that as a benchmark. The 1% rule was created after the last crash when prices were 50% lower and interest rates were 3%, it's not applicable anymore in the majority of markets. In Austin 2 years ago 0.65% was a great rent/price ratio and hit my investing goals so when I came across a 0.7% deal I knew I needed to act fast.

Except when interst rates area higher, you should get better than 1%, not worse. High interest rates should drive prices down, rents up, making the rent:purcahse ratio better.

I don't see how people make money even with the 1% rule. I've bought 2000 units and never paid more than 1%. Literally the only exception is a bunch of patio homes I bought in a good area of Houston (Galleria area). I think I paid about $230k/each and they rent for about $2,200/each. But everything else has been over 1%. Sometimes well over. And in good areas. If warzones I need 2% at least.

(to be fair, I'm talking about multifamily. I realize it's hard with homes)
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