1% and 50% Rules - CF Breakeven

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1% and 50% Rules - CF Breakeven

David Gelinas
Member since 2018 · 1 post · 0 votes

Hi - newbie here trying to understand how some of the shorthand rules apply in a SFH BRRR and can't quite make sense of them. Let's use a basic example:

Cash Purchase a home for $70,000 + $10,000 Rehab and ARV is $115,000.

Investment Refinance LTV: 70% (it's my understanding that when you refinance most banks won't lend above 70%)

Annual Rate: 5.5% (seems reasonable for a refinance investment loan)?

Monthly P&I Payment: $617

So you get all your cash out at the higher ARV, but the cash flow doesn't seem to work...

1% rule would say $1,150 Gross Rent per month

50% rule would say $575 left over for P&I...which is less than $617

Where am I going wrong here? Does the 1% and 50% assume a higher LTV or lower interest rate environment? What am I missing?

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  • William Robison
    Real Estate Consultant · Kansas City, MO · Member since 2013 · 388 posts · 200 votes
    6y

    50% rule for the most part is designed to be taxes, insurance, maintenance, management, capex, vacancy, etc. The rest of the 50% would cover PITI and leave money for cash flow. $400 is the P&I payment on $80000 invested. With your numbers above, you would yield $175/mo. at the 50% rule.

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  • Guifre Mora
    Lender · San Diego, CA · Member since 2019 · 874 posts · 355 votes
    6y
    Originally posted by @David Gelinas:

    Hi - newbie here trying to understand how some of the shorthand rules apply in a SFH BRRR and can't quite make sense of them. Let's use a basic example:

    Cash Purchase a home for $70,000 + $10,000 Rehab and ARV is $115,000.

    Investment Refinance LTV: 70% (it's my understanding that when you refinance most banks won't lend above 70%)

    Annual Rate: 5.5% (seems reasonable for a refinance investment loan)?

    Monthly P&I Payment: $617

    So you get all your cash out at the higher ARV, but the cash flow doesn't seem to work...

    1% rule would say $1,150 Gross Rent per month

    50% rule would say $575 left over for P&I...which is less than $617

    Where am I going wrong here? Does the 1% and 50% assume a higher LTV or lower interest rate environment? What am I missing?


    David cash purchase can get you a refincnace with cash out as high as 80%.

    Your fico score will also come into play here. What rate and LTV you would qualify for. 

    Loan amounts also come into play. 5.5% seems reasonable for now.

    115,000 x 75% = 86,500 @ 5.5% = PITI is around 618. The 1% rule is based on the mortgage not the ARV = 865

    The 50% Rule is just a shortcut to estimate the Net Operating Income or NOI of a rental property. ... The 50% Rule says that you will only keep 50% of the rent you collect on an average rental after paying for vacancy, management, taxes, insurance, and maintenance. The 50% Rule and NOI exclude mortgage costs.

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