Posted 4 months ago

1.15% - The New 1% Rule

The 1% rule was never meant to be used as "Go/No Go" Criteria, but somewhere in there it has to work...lets say 51% of the time to be a rule...right? I was curious to see if that was the case. The first thing that I had to decide was what made something "work". It has become reasonably common to use 12% CoC ROI as a Go/No Go criteria and that is where I started my backwards math from. Some other assumptions that I made were

Turn Key

25% down - if this were lower then the %ROI would increase if there was no PMI

5.75 % loan rate - This is pretty standard for an investment property 

30yr Term - Always

5% Vacancy - This may be a little high for the Fayetteville Market

5% Maintenance

5% CapEx

10% Management - Talk to your property manager about how to get this lower

Taxes = 1% of ARV -  I use ARV here instead of PP to make the point that if you assume this on a BRRRR deal or something then you would need to use the higher value

Insurance = 1% of ARV - Same

With all of these assumptions plugged in you will only get a 12% return if the rent is at least equal to 1.15% of the PP. Long story short, the 1% rule is not an effective method to use when evaluating a deal that does not have some form of an equity play to it. We are now in the Era of the 1.1%+ to find a good deal. 

I think that it is also important to note that this should be true in your BRRRRs as well. Don't let your forced appreciation cover up the fact that you will need to sell this property one day and how it is able to perform as a turn key is very important in how it will actually sell later. Appraised value is not generally the value that you will receive upon resale and certainly will not be if the property is slightly behind on what market rents are for most other like comps.