1% Rule

[Jamie Larson]

Hi!

First Post on Bigger Pockets:  I've heard about the 1% rule of charging 1% of the property's purchase price for monthly rent.   I've even heard about the rule being called a 2% rule.  I'm just getting started in researching real estate in the Bay Area CA and don't see investing in the area, while keeping that rule in mind is possible.  Even if you're looking out of the city, you can pay $1M for a duplex.  Does this rule mean that you won't make a profit unless you charge $5,000 per 2 bedroom/month?  That rental price is way too high. Why are people purchasing these buildings if they are nowhere near breaking even?

Jamie

[Andrew S.]

@Jamie Larson 

 Welcome to BP!  Do a search on "1% rule" or "2% rule" on this forum as it has been discussed dozens of times and there are many, many threads discussing the topic in detail.  

In a nutshell, not all markets will generate 1%,  Bay area is often cited as an example that violates that rule, along with places like NYC, SoCal, etc.  What the rule means is that cash-flow will be small or negative for properties that fail to hit the 1% target.  One reason to invest in those markets anyway is if you believe that the increase in property values will make up for low (or negative) cash flow.  This has certainly been the case over several recent stretches of time in the Bay Area.  Some people think this should not be called "investing", but rather "speculating", but others seem to be quite successful at it.

On the other hand, there are parts of the country (midwest, rustbelt) where people routinely hit the 2% rule and therefore tend to cash-flow quite well.  However, typically those markets don't appreciate as much (or at all) over time.  

In my neck of the woods, we are somewhere in between.  It's not easy to get much higher than 1% in a decent neighborhood, but we do enjoy moderate appreciation over time.

Hope this helps some!