Is the 1% Rule Dead?

Question

I say it is, for residential real estate.

It’s not 2014 anymore. The real estate game is professionalized, lots of players in the game. And in general, NOI Margins have compressed , and 7% interest rates add insult to injury .

But! Fellow BP compatriots, what say you?

James Wise · Answer

You did it now bro...........

THEY

ARE

COMING!!!!!!!

James Wise · Answer

It's alive and well in the Ghetto of Cleveland, Detroit, Toledo and other places like that, if you're into that type of thing.

Bill B. · Answer

Are you the 100th person to post asking is the 1% rule dead? I think you are…

You can easily make money at 0.6% and you can easily lose money at 1.5%.

Ned Carey · Answer

@Andreas Mueller

Lets presume the 1% rule is valid. What do you mean by is it dead? I suspect you mean you can no longer use it because you can't find deals that meet the 1% rule.  This is absurd. The rule is doing exactly what it is supposed to do. It is telling you not to buy.

If you are going to set up criteria and then ignore that criteria then why have criteria in the first place. This isn't about the 1% rule, we could  be talking about a full multi year workup of income and expenses. If you are going to keep fudging the numbers until the deal works - what is the point?

Now lets talk about if the 1% rule is valid. It depends on your market and your specific situation and goals. It was  never meant as a hard and fast rule it is one of the most crude generalizations out there. However it is extremely useful. Because in 5 seconds I can rule a deal out based on that 1%. Now the exact number you use does not have to be 1% some used to say 2% as @Andrew Syrios said. But if you don't have a number to quickly rule out a deal you will be wasting a ton of time evaluating deals that will go no where.

For years @Joe Villeneuve has posted against the 1% rule (and other rules) but I bet Joe has in his head a way to evaluate in seconds whether something is worth investigating further.

Stuart Udis · Answer

The 1% rule was never more than a back of envelope exercise at best. The analysis doesn't take into account expenses which disproportionately impact the lower cost markets.  Ironically, its these markets that frequently draw in investors seeking their 1% properties believing they will cash flow XYZ per door allowing them to retire form their W2. I don't hear many of these "success stories".

Greg Scott · Answer

From the beginning, the 1% rule was a problem, even back in 2014.

My first few rentals from way back in 2010 met the 1% rule.  Even though they were in decent areas, and I made money on them, those properties were not my best performers. Why?  Because I paid full-price for the property, thinking that because it had cashflow, that was all I needed to do.  These days I always try to buy under-performing property and add value.

As real estate started to up in value after the GFC, people that followed the 1% rule slowly got relegated to the very worst parts of the city.  I saw a post on LinkedIn recently from a guy in Chicago that said SF rentals are for clowns.  He had followed the 1% rule and bought Section 8 properties in crime-ridden, drug-infested part of town and then wondered why he wasn't doing well.

The 1% rule may have hurt more people than it helped.

JD Martin · Answer

Yeah man, but you're forgetting one thing - Columbus. Where deals are just waiting to be picked like peaches from a tree and there's lots of excellent agents ready to show you how 😛

David Krulac · Answer

Just bought a property with 4.75% interest fixed for 30 years, and bought two properties with 4.25% interest fixed for 10 years and then variable for 20 more years.  Also bought a house for $155,000 that will rent for $1,585.

Marcus Auerbach · Answer

Real estate has a dynamic pricing model: the higher the risks and baggage, the lower the price. I live in one of the best "cash flow markets" and I have been buying under 1% for the last 10 years.

Typically around a 0.8 ratio, while you could still find 2% deals back in 2015.

Why? Because I like quality properties in good locations and school districts that are desirable to nice tenants with stable lives (which is a level up from stable income). They stay many years, it minimizes my headache factor (and with that overhead expenses), our vacancy rate is close to zero and I am in neighborhoods that appreciate really well.

And I own assets that would be easy to liquidate if I ever wanted. If you buy a deal from a motivated seller for a really low price, understand that you are trading places with the seller in exchange for money.

Michael Smythe · Answer

@Andreas Mueller it's obviously dead for you, which is probably a good thing for your clients.

We keep finding value plays for our clients:)

Is the 1% Rule Dead?

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