Understanding the 1% rule

[Colin Leach]

I have read posts and listened to the podcasts and they discuss the 1% rule which I understand is a rule of thumb. I see this small duplex (1 bed/1 bath each side) listed for 70k. It is rented out right now at $450 per side for $900 a month. That is above the 1% rule so it looks like a good deal until I run the numbers. Expenses come out to $950/month with is -$50 cash flow. I believe the rents could be raised to $600 which would put me at $160/month cash flow. That sounds better, but I am unsure on the rents. A property manager in my area said it could support $600 a month. I am not so sure, but then again I am still new at this. Help me better understand the 1% rule. Do I just look at rents and purchase price and if it's 1% that just tells me to analyze further? Do I just use it as a criteria to look closer or skip it?

Property tax: $1227

Loan info: 6%, 20 year am, 15% down - $400/month

Vacancy 5%: $45

Repairs 5%: $45

CapEx 8%: $72

Mgmt Fees 10%: $90

Insurance: $200

[Kyle J.]

$200 a month for insurance on a $70k property is really high. That number is killing the cash flow more than anything else. You sure that’s correct?