How important is the 1% rule?

[Peter Ferre]

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]

@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.