How to price duplex with 1% rule -- do I use current rent?

[Ken Swearengen]

I found a duplex I like, it would be my first investment property. Rent for unit #1 is 1100 and unit #2 is 850. Asking price for duplex is $225k. Now using the 1% rule, I should be asking $195k. However the rents are significantly under market. I could probably raise them to 1300 and 1000 no problem (that's still lower 25th percentile for area rents), which would make the asking price of 225 a great deal.

My question: Does the 1% rule work on existing rent or expected rent? If I have to be the one to raise the rents and possibly lose the tenants, I feel like I should be compensated for that with a lower price. Or are my expectations out of line with what actually happens in multifamily REI?

[Jaysen Medhurst]

@Ken Swearengen, a few things:

1. Yes, your expectations are out of line. This is a residential (1-4 unit) property. No one cares about your investment or if it will make money. In residential it's all about comps. If this were 5+ commercial, that would be a different story.
2. The 1% rule is just a guide. You have to do a full analysis of every property you're considering. Share ALL the numbers here and the community will be happy to double check and offer opinions.
3. Why not do both, go for a lower price and plan to raise rents? Asking prices should be ignored. If you allow the seller to anchor your valuation of the property, you'll find yourself in trouble. What are other similar properties selling for (not listed, sold)? Is this property in better or worse shape? How much renovation is required? Figure out a price that works for you then drop it down to give yourself some room to negotiate. You know what the old timers say? "If you're not cringing when you make the offer, you offered too much."