1% Rule for Evaluating Properties

[Aaron Cox]

I am extremely new to this world and trying to figure out how to analyze potential properties.  I keep hearing and reading that your monthly rent should be 1% of the purchase price to ensure that the property cash flows.   In theory I understand this, but have run into an interesting question.  In looking at turnkey properties the rents are routinely less than 1%.   Does this mean that these properties are not suitable cash flowing investments?  Is there another calculation that I should be looking at to ensure that the property cash flows?  I understand that you have to look at total monthly costs, including cap ex, mortgage pmts, insurance, vacancies, taxes, etc.  Seems like there is something I am missing if the rent payments for these properties are less than 1% of the purchase price.  All of their marketing materials say that these properties cash flow.

[Joey Kincer]

You don't need to strictly adhere to the 1% rule; some see it only as a guideline. My first investment property (which was turnkey SFR) only met the "2/3% rule" but still managed a $650/mo cash flow (soon to be $800/mo due to pending tenant turnover). Anything that meets or exceeds the 1% rule are likely to be cheaper properties that carry a higher risk with tenant clientele. I'd rather keep risks minimal and buy upscale properties, even though it sacrifices a little return, as long as the cash flow and ROI are still decent. Obviously it depends on how much capital you have to get started. Also, everyone's risk tolerance is different, you may have the temperament to deal with potential riff-raff while others (like myself) do not.

The 1% rule is a nice-to-have if you can get it, but don’t let it be your sole “make or break” stat if all the other numbers make sense.