Mortgage Rates Eating into Cash Flow Under 1% Rule

[Ted Barrett]

Hi all,

I've been trying to find updates of the 1% rule and whether it's working in 2024, specifically when you're using a mortgage at 80% LTV, 30-year mortgage. Looking at rates today, if I were to buy a property for $125k and have a $100k mortgage, the rate would be 6.25%, and with a 30-year mortgage, that's $7.5k of annual mortgage payment. Annual rent with the 1% rule is $12.5k. This means that mortgage payments eat up 60% of rent even before considering vacancy. This means the 50% rule fails now (50% + 60% = 110% --- 10% more in costs than rent), and other cost estimate methodologies seem to yield negative net cash flow.

Am I thinking about this correctly? Has anyone who has historically used the 1% rule modified it to accommodate current interest rates?

Thanks,
Ted

[Nicholas L.]

@Ted Barrett

your analysis is roughly correct.  higher rates have crushed cash flow.

i never really used the rule to begin with. i just looked at lots of individual properties. i will also do a BRRRR if i can break even when i'm done and get 90+% of my cash back out.