Is the 1% rule dead?

[Saad D.]

Hi All,

I was wondering are you still using the 1% rule when doing quick and dirty new deal analysis? Is anyone out there still able to achieve the 1% rule and in which markets?

Recently I noticed I get to 0.7 or 0.8% at best (i.e. 100k purchase price, $700-800 rent per month). 

Excited to learn from you all!

[Diyan Yap]

Not dead, still famous out there.

I never use 1% rule, I always go Zillow/Redfin rent for a quick check. 
 

[Kevin Sobilo]

Quote from @Saad D.:

Hi All,

I was wondering are you still using the 1% rule when doing quick and dirty new deal analysis? Is anyone out there still able to achieve the 1% rule and in which markets?

Recently I noticed I get to 0.7 or 0.8% at best (i.e. 100k purchase price, $700-800 rent per month). 

Excited to learn from you all!

With interest rates where you are, does that $100k purchase with $800 rent generate positive cashflow or does it take nearly $1000 to generate some cashflow?

The 1% rule is alive and well and useful for what it was intended a QUICK rule of thumb screening tool.

If you see someone advertise a listing as you said at $100k with $800 rent that is 0.8% if you read the listing and see potential to get that to a 1% deal with some work, it might be worth looking at further and doing a deeper analysis, otherwise probably not worth the time.

It's easy math and 1% in many markets will generate a little positive cashflow. It isn't a "RULE", its a "rule of thumb" to help you focus in on properties worth analyzing more.

Even though I alluded to it earlier in my response, a deal is NOT what's advertised to you. A deal is what YOU MAKE OUT OF IT! Something to keep in mind.

[Jason Bohling]

@Saad D. never paid attention to the 1% Rule, and while some people in some markets can occasionally find a deal that it will apply to, it isn’t feasible in most situations.

The last few years I've seen it as pointless, as it was never a hard rule to be followed explicitly but a suggestion, and it seems like the only ones today who give it any credence are those brand new to REI and have heard it discussed on the older episodes of the podcasts or read about it in the books BP published 5+ years ago. I look at every property on its own merits.

I know others will disagree and that’s great, the more varied the perspectives the better. But in my opinion the 1% Rule has gone the same way as the 2% Rule. Both are irrelevant.

[Scott Trench]

The 1% rule is essentially not going to happen in most markets, unless you are in the midwest or more rural/LCOL areas. 

I tend to think about it a little differently. I look for locations that I am comfortable with, and look for the best rental yield I can get in that location. This is how I begin my search. However, the highest yielding property is often not the property that I actually want to buy. It just helps me sort out all the stuff that definitely won't work.

[Miguel Del Mazo]

“Don’t put all your eggs in one basket” is all wrong. I tell you “put all your eggs in one basket, and then watch that basket.” --Andrew Carnegie

My advice (which is not worthy of sharing the screen with a BP host/Prez) is to pick a market near you where you think you would like to own a property.  Investigate to see if there are people/jobs moving there, and if there are, start running evaluations on every property for sale that pops up in that area. Learn the geographic boundaries that define price changes. Use rental calcs to learn what is in demand and gets a premium.  RUN THE NUMBERS. Keep doing it again and again.

 Eventually, you will see a property pop up that is an outlier in your favor, and you will be the only person who knows that market so well as to be able to strike quickly.

The 1% rule had a value at one point, maybe as a screening tool, but it could never compete with the specialist who has done the reps.

[Ben Zimmerman]

Don't use napkin math 'rules' to make investing decisions on.

I hate the 1% rule, for the same reasons I hated the 2% rule a handful of years ago.  When people hear the word rule, they think that if they don't meet that mark, that they are doing something wrong.  Times change, markets change, interest rates change, but we still hear about these same old "rules" decades after they lost their relevance.

The same logic applies for napkin math rules that say that capex, vacancy, repairs, or whatever, should each be estimated at X% of monthly rent.  A 100k home in Podunk Oklahoma that was built in the 1930's, is going to probably need a whole lot more than 10% of rent going towards capex, and likewise a 1m home in San Francisco isn't going to need anywhere near 10% of rent for capex.  Both homes are probably roughly the same SQ footage, the same level of niceness etc.  It's not going to cost you 10x the price to replace the HVAC in SF, than it will to replace it in OK.  

Furthermore, when you chase yields and try to hit 1%, you typically start loosening your investment criteria to chase that yield.  If you can't hit your targets in a B neighborhood, you start looking into C or D neighborhoods instead.  Sure that property property in the ghetto looks like it has a nice yield on paper, but in 5yrs time, you will have wished you had stuck with the B property instead.

Analyze a few hundred deals to get a firm grasp on what the market norms are.  Then the next time you find a deal that meets your investment criteria, at a below average price, then buy it.  Don't think about it, just buy it.

If you are second guessing yourself and wondering if it's a good deal or not, then you haven't analyzed enough deals.  When you've looked at enough deals you recognize a deal when you see it.

[Mike Dymski]

Quote from @Miguel Del Mazo:

“Don’t put all your eggs in one basket” is all wrong. I tell you “put all your eggs in one basket, and then watch that basket.” --Andrew Carnegie

My advice (which is not worthy of sharing the screen with a BP host/Prez) is to pick a market near you where you think you would like to own a property.  Investigate to see if there are people/jobs moving there, and if there are, start running evaluations on every property for sale that pops up in that area. Learn the geographic boundaries that define price changes. Use rental calcs to learn what is in demand and gets a premium.  RUN THE NUMBERS. Keep doing it again and again.

 Eventually, you will see a property pop up that is an outlier in your favor, and you will be the only person who knows that market so well as to be able to strike quickly.

The 1% rule had a value at one point, maybe as a screening tool, but it could never compete with the specialist who has done the reps.

This is spot on.  I will add that buying in the path of progress helps...desirable areas in growing cities adjacant to the areas that have already taken off.

[Sean Gallagher]

So those of you who are against the 1% rule or don't use it as a strong indicator, what is your preferred indicator on a deal, COC, ROI, cap rate? And if it's one of those what is your ideal number.

[Stuart Udis]

The 1% rule incredibly flawed, even as a short form underwriting technique. I observe investors dismissing so many properties that fail to meet this arbitrary standard but perform far better than properties that pencil as "1" properties" on an excel spreadsheet. Here's my primary reasons:

1. Expenses disproportionately impact lower rent collecting properties For illustration purposes compare two identically designed 1+1 duplexes in the same market.  The “A” located duplex has one bedroom units that rent for $2,000/m and the “C” located duplex in the same market has units that rent  for $1,200/m. Now assume each unit is occupied by 1 person. Common utilities paid by the landlord will be similar if not the same; standard services (extermination, changing filters, snow removal, fire safety inspections etc.) will cost the same. Book keeping/tax prep costs the same.
2. Expenses will vary depending on the market The cost of doing business varies from municipality to municipality. A $200,000 duplex might have identical rents in municipality “A” and municipality “B” but the property tax rates will vary, local regulations will dictate licensing requirements, labor rates will vary & the particular location will dictate insurance premiums since insurance carriers will weigh local replacement costs and whether the municipality is viewed as being a “plaintiff friendly” in arriving at insurance premiums.
3. Better situated assets will attract better tenants/higher rents & reduced management expenses Tenants who reside in better situated housing and pay higher rents are more financially responsible meaning lower rate of rent loss and will generally take better care of the property. Expect to allocate less time  towards management functions if self-performed or more favorable management fee structures if 3rd party management companies are utilized (which ties back to #1, as well).

[Timothy Hero]

If it exist, it's usually on SFH under $180k, and at that point, the profit is so little, it's not worth the headache.

I have clients with portfolios of 15+ single families in this range, and to see them pocket $200-300/month is exhausting lol.

One maintenance request erases 6 months of cash flow.

[Nicholas L.]

@Saad D.

I never used it and I don't use it now.  It was always just a screening rule, and never took into account the complexity of the underlying costs.

I'll BRRRR anything if I can break even on rent once I've refinanced. YMMV.

[Samuel Diouf]

There are plenty of 1% rule deals in Ohio. I moved from the Florida market to Ohio because of the higher rent ratios. 

Cities like Columbus are going to be more appreciation focused, but you can still pick up MFHS at the 1% rule. Whereas areas like Dayton and Cleveland are going to be more cash flow focused and you're able to pick up turnkey deals that go over 1% rule. 

[Jason Bohling]

@Sean Gallagher I look at CoC/Return on Investment but main focus is on Internal Rate of Return (IRR). I'm not into commercial so I don't pay attention to cap rate.

I put my money where it's going to perform best, either in real estate or my brokerage account in the form of an S&P 500 index fund. I want what's doing best, as the S&P since the Depression has returned on average 10.6% (it fluctuates by .1 or .2% periodically) if I buy a property I want it's IRR to at least beat that. Those are difficult to come by so I'm keeping my powder dry and investing through my brokerage right now until something pops up. As a comparison, the S&P 500 index fund I use is returning 22.42% over 1 year and 18.69% year to date.

[Patience Echem]

As a new investor who is still learning, I have listened to the old episodes of BP podcast where the advice then was "don't consider it unless it meets the 2%rule." Somewhere in the middle, it changed to at least 1%. Now the new leaders kind of think anything above 0.8% is okay. What is often missing is the caveat that each deal is different. The property age, location, interest rate, etc. will influence whether one cashflows at 2%. 1%, or 0.6%. the rules as someone already pointed out is just a guide. Hard and fast rules often have their limit. That is where we are right now. 

[Russell Brazil]

Yield is a function of risk. Higher the risk, the higher that % will be. 

[Jason Bohling]

@Patience Echem I agree. Even if it were easier to find ‘1% rule’ properties nowadays, you still have to look into it and do your due diligence as every circumstances different. For example, you go to a high property tax state like Texas and you may find a property that appears to fit the 1% rule but once you factor in the $500/month property taxes and $100/month insurance your potential cash flow has gone up in smoke.

[Alfath Ahmed]

Quote from @Saad D.:

Hi All,

I was wondering are you still using the 1% rule when doing quick and dirty new deal analysis? Is anyone out there still able to achieve the 1% rule and in which markets?

Recently I noticed I get to 0.7 or 0.8% at best (i.e. 100k purchase price, $700-800 rent per month). 

Excited to learn from you all!

 It depends market to market. I buy and invest here in Columbus. Here I am seeing a similar average to you in the 0.7 to 0.8% rule. However, we can achieve higher values when buying deals off-market. 

My team does about 1,500 to 2,000 call/day to find off-market leads in Columbus and those I have seen beat the 1% rule. 

[Kevin Sobilo]

Quote from @Jason Bohling:

@Sean Gallagher I look at CoC/Return on Investment but main focus is on Internal Rate of Return (IRR). I'm not into commercial so I don't pay attention to cap rate.

I put my money where it's going to perform best, either in real estate or my brokerage account in the form of an S&P 500 index fund. I want what's doing best, as the S&P since the Depression has returned on average 10.6% (it fluctuates by .1 or .2% periodically) if I buy a property I want it's IRR to at least beat that. Those are difficult to come by so I'm keeping my powder dry and investing through my brokerage right now until something pops up. As a comparison, the S&P 500 index fund I use is returning 22.42% over 1 year and 18.69% year to date.

You can't beat ~20% in real estate? You only need to get around 4-5% when you include leverage to equal those returns you cited and then factor in tax advantages and you are exceeding those returns.

[James Wise]

Quote from @Saad D.:

Hi All,

I was wondering are you still using the 1% rule when doing quick and dirty new deal analysis? Is anyone out there still able to achieve the 1% rule and in which markets?

Recently I noticed I get to 0.7 or 0.8% at best (i.e. 100k purchase price, $700-800 rent per month). 

Excited to learn from you all!

 You can still exceed the 1% rule in places like Cleveland, Detroit, Toledo and Dayton.

[Evan Hopple]

@Saad D.

Those deals are still out there, more so in markets with less growth potential. They're most common on C class duplexes in my market. 

I recommend connecting with deal finders in the area you're looking for deals that aren't available to the open market.

[Jake Andronico]

@Saad D.

It's not dead, but it also doesn't calculate the MASSIVE elephant in the room....EXPENSES. 

This is why Cap Rate is so important, and ultimately cash on cash when you overlay financing. 

We calculate the entire Northern Nevada market (Reno/Tahoe) simultaneously and rank by cap rate. 

This helps investors filter down their view of the entire market and not have to go one property at a time. 

Cash flow is nice, but appreciation builds wealth. 

[James Hamling]

@Saad D. I have never liked the "rule" as it facilitates investing via assuming. 

And yes, I can still achieve this mark but I also have no interest in marketing that fact with a treasure map to flood my "honey-holes" with _-holes to just ruin it all.... 

[Paul Pratt]

I agree, shouldn't be taken to heart.

Most of the properties in Daytona Beach that hit the 1% rule have a ton of deferred maintenance, are in flood plains and have a high vacancy rate. So by that "rule" you will have a lot to chew on.

OR you could scan for well-constructed properties not in a flood zone and have a much smoother time. The choice is yours really. BUT truly knowing the market and the lay of the land before you invest is always key.

[Rob Hakes]

Remember the 2% rule?  Its as dead as that

[Henry T.]

Of all the sfr's that I've bought, everyone of them (except one) made 1% or better from the get go.  I have not bought any for a while and my asset appreciation has been enormous. Now I use the 1% rule as a measurement to guage how out of whack things are.  However, I believe it's still possible in many other areas of the country.