One percent rule for new investors

[Jay C.]

On its face it seems pretty difficult to find a property that is going to net you 1% of the purchase price in rent when you are starting out. Just running some numbers in the Little Rock market that would mean for a $150k house (of which there are many 3/2 variety) you need to pull in $1500/mo in rent. That's just tough to do even if you get a property 10-15k under value around 1500 sqft for 135k-ish let's say you are likely in the $1100-1200 rent range based on my research (and experience living here for many years).

I am curious about how realistic it is to target that range. I know you can buy a property in much more distress but then you are eating up a lot more cash upfront to get it rent-ready. If I buy a severely distressed property for 80k that will take 40k to get to $150k ARV and $1100-1200 rent I am in the neighborhood of that 1% number altho at the price of a lot of expense and risk. In that scenario, however, I would be getting a lot of equity in the process. Maybe I am looking at this all wrong? Please advise, thanks!

[Dave Spooner]

@Jay C. The 1% rule is really just a quick math tool that investors use to determine if an investment is worth doing more detailed financial analysis on and as others have mentioned, it is very very dependent on market. Just figure out what your "1% rule" is and use it as a gut check when considering a property.

Ultimately, I would recommend running a cash-on-cash-return and internal rate of return analysis. As long as you can clear your cash flow hurdle, you should feel safe. Then it's all about finding a property that offers the best possible return.