How important is the 1% rule?

Question

I am looking at an 8-unit apartment complex right next to a major University that is cash flow positive. However, it does not meet the 1% rule, with it being at .81%. How much should I weigh the property not meeting the 1% investment rule? Are there any other factors you recommend for me to look at to determine whether I should invest in this property?

Jaron Walling · Answer

@Peter Ferre The 1% rule is not a law. It's just a ratio investors like to follow or ballpark when comparing opportunities. Before the 1% rule was the 2%... back when RE was cheaper post the crash. In my market most SFR investors, in C-B class, are happy with $0-200 per month cash-flow. That's pennies compared to what investors were cash-flowing from 2010-2015. In today's market you need to think past rules and percentages and think about dollars and creative deals. What is the COC for the 8-unit property at today's rates? What's the condition of the units, roof, and building as a whole? What expenses can you reduce? What is the rent roll and can you increase it?

Those are creative ways to make an investment play out. Without any forced appreciation, increased NOI, decreased expenses, or creative financing (seller financed) you most likely don't have deal. The most popular, growing, strong economy markets are HOT for multi-family. Maybe the seller is trapped between refinancing a commercial loan. These types of loans are hitting the commercial markets pretty hard. Find that pain point and create a deal that works for both parties.

Scott E. · Answer

My advice is forget about the 1% rule and any other arbitrary rule that you've read about on the internet.

Instead, start actually underwriting deals.

If you are looking at buying an 8-unit apartment complex, that is no joke. You need to learn how to actually underwrite this deal to see if the numbers fit your investment goals. Once you look at a handful, you'll be able to run numbers on an 8 unit deal in 5 minutes.

Theresa Harris · Answer

The percentage doesn't matter, it is the actual numbers that are important.  What is your revenue vs expenses?

Eliott Elias · Answer

The 1% rule does not exist anymore. Take it out of your real estate investing dictionary. Some old heads on here may still be looking for it, they end up not buying any deals.

Ray Hage · Answer

It's hard to find anything with 1% that's on market and turnkey. Sure you could buy something, renovate it and get it to 1% rule if the market rent allows it. I would forget about it for now and make sure you are crunching all the numbers correctly! If it pans out to 0.8%, I think that it will most likely still be worth it. There a ton of other factors though. Is the city growing? improving? how is the property tax situation? Insurance increasing quickly (like Florida for example)? These are all things (and more!) you need to factor in for a long term buy and hold.

Luka Milicevic · Answer

I get investors calling me asking about the 1% rule after just finishing bigger pockets podcast episode 12.

Some things are not what they once were.

I could not find a true 1% deal in my market no matter how hard I tried. In some markets, I don't doubt that it's still possible but what it sounds like in most markets it's not going to happen.

Rent/value ratio is just a starting point for a deal.

There are so many other factors to consider when looking at deals. My recommendation is to put pen to paper and analyze a deal beyond just the rent/value ratio. Look at your goals, then look at the deal as a whole. Consider the long term tax benefits, appreciation, growth in the neighborhood. Then compare all that to your goals and see if the deal lines up with what YOU want to achieve.

Bigger pockets has great calculators and tools so be sure to use those as a resource when analyzing deals.

Bob Stevens · Answer

Correct NOT  in Fl as its way overpriced in the entire state for the most part. I live in FL so know it very well. We are getting 2- 3% rule in other markets. Its all about knowledge and your team.

Chris Barrett · Answer

Determine a metric you care about, such as CoC return, or ROE, or IRR, or monthly cashflow amount and use those measurements. 1% rule is just a do the math in your head thing, but in appreciating markets you'd never find any deals to buy if that's all you use.

Ian Walsh · Answer

1% I find tends to be a bit tight.

Bob Stevens · Answer

zero, everyone is happy with their own numbers. Me I only pay cash and will not do anything for less then 20% net. Others pay cash and are happy with 5%, loan buyers, happy with 4%. The point is there is no right or wrong answer. If you a happy then do it, but do it so many just look,

All the best

How important is the 1% rule?

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