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!

[Michael P.]

No longer a rule, just a ghost in the past, A relic of days when profits were vast.

Now we chase dreams in a world redefined, Where rules once golden are left far behind.

[James Wise]

Quote from @Rob Hakes:

Remember the 2% rule?  Its as dead as that

 You can get that in the hoods of most midwestern cities. But obviously when your in the hardcore hood you can't really predict returns all that consistently.

[James Wise]

Quote from @Michael P.:

No longer a rule, just a ghost in the past, A relic of days when profits were vast.

Now we chase dreams in a world redefined, Where rules once golden are left far behind.

What can be unburdened by what has been.

[Henry Lazerow]

In higher crime areas you can still find 1% but it comes with less actual rent collection/costlier issues. 

[Sean Gallagher]

From what I'm seeing the higher rents are getting harder to make work does anyone else notice this?  A lot of the homes that will rent for 2000 - 2500 are in much nicer areas which are the ones who have seen large increases in property values over the past years.  The 1000-1500/mo rents seem to be the most common?  Which just means we will have a lot more properties to reach our end goal versus a lot less homes that will rent for more to reach the same end goal.  More headaches.. humm  

[Dan H.]

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!

I hope your not purchasing these at high LTV and expecting positive cash flow. These would not have positive cash flow at high LTV with 1% ratio.

If it is dead at the rent point you reference than so is initial positive cash flow.  I suspect @Bob Stevens would indicate not dead.  

[Dan H.]

Quote from @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.

5+ years ago it was the 2% rule and I have been hearing it in REI meetups since shortly after the Great Recession (at least since 2012).

[Dan H.]

Quote from @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.

True if it is not negative cash flow. Most MLS purchases at high leverage indicated by those numbers have initial negative cash flow.

[Alecia Loveless]

@Timothy Hero The average cash flow per unit is still considered good at $200-$300per month. I have a portfolio of 30 units that has appreciated over 400% in 4 years that I have an average cash flow of about $270/unit. In my market this is considered a great return.

[Kevin Sobilo]

Quote from @Dan H.:

Quote from @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.

True if it is not negative cash flow. Most MLS purchases at high leverage indicated by those numbers have initial negative cash flow.

I don't think I mentioned JUST cash flow.

However, a cash flow focused investor is finding positive cash flow even if they have to buy off market, in a different cash-flowing market, or create cash flow through value-add, etc.

Also, money is made 3 ways holding real estate. In addition to cash-flow you have potential market appreciation and also mortgage pay down. Mortgage pay down alone will go from about 1.23% to 6.9% per year over the life of a 30 year loan. So, it averages out to 3.33%. Add to that market appreciation and any cash flow and there ya go. 

[Bob Stevens]

Quote from @Dan H.:

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!

I hope your not purchasing these at high LTV and expecting positive cash flow. These would not have positive cash flow at high LTV with 1% ratio.

If it is dead at the rent point you reference than so is initial positive cash flow.  I suspect @Bob Stevens would indicate not dead.  

 Correct, all mine are about 2% . I closed last month all in full reno 75k, rent will be 1500, Closing on a Duplex this week, all in 90k, rent will be 1800- 2k, Next week same numbers, 

Another with seller financing, ZERO down, $500/ month (total 900/ month) rent will ne 1800 - 2k, THATS a great deal, I wish I could get 20 of them. 

My client all in 110k, his rent is 1700, GREAT numbers.

[Bob Stevens]

Quote from @Henry Lazerow:

In higher crime areas you can still find 1% but it comes with less actual rent collection/costlier issues. 

 NOT if you know what you're doing and have a team in place. I get 2% on avg for all my personals, NO not war zones. All in 75k, rent 1500- 1600 All in 90k, rents 1800- 2k, 

[Mohammad Parwez]

You can still find a few properties in my Triad NC area where a few properties get closer to the 1% rule.

However, most of the properties are now in the 0.6-0.8% range. 

For example, you can get a 3 bed/2 bath SFH in a decent neighborhood for about 270-300k that can generate a rent of about 2000-2300/m.

Thanks

[Bob Stevens]

Quote from @Mohammad Parwez:

You can still find a few properties in my Triad NC area where a few properties get closer to the 1% rule.

However, most of the properties are now in the 0.6-0.8% range. 

For example, you can get a 3 bed/2 bath SFH in a decent neighborhood for about 270-300k that can generate a rent of about 2000-2300/m.

Thanks

Mohammad Parwez

336-999-9086

https://mohammadrealtor.com

 People really invest 300k to make less then 6% net? WOW, I really am spoiled. 

[James Hamling]

Quote from @Bob Stevens:

Quote from @Henry Lazerow:

In higher crime areas you can still find 1% but it comes with less actual rent collection/costlier issues. 

 NOT if you know what you're doing and have a team in place. I get 2% on avg for all my personals, NO not war zones. All in 75k, rent 1500- 1600 All in 90k, rents 1800- 2k, 

I have to 2nd Bob here. 

Just because you're not finding them doesn't mean they don't exist. I have a market, NOT a "war zone" that I can consistently hit 1%+. About double price point to Bob's market but point is, YES it still exists. 

For last many months, if not 2yrs+ people been howling how "there's no deals anymore"..... And some of us been replying back yes there is, just where they are, how to get them, has changed a bit and it's no longer as simple as closing your eyes and randomly throwing darts at a MLS map and buying whatever. yes, those days are long gone but if your willing to roll-up the sleeves and get professional at it, there is "deals" all over the place, you just gotta get skilled on how to find them, tap them, monetize them.

Hell, someone sent me an update today on sec8 payment standards in MSA where sec8 is paying dang near $4kmnth! It ain't the '80's anymore, sec8 tenant is a-changing. Learn that space and you'll be drowning in opportunity. 

[James Hamling]

Quote from @Bob Stevens:

Quote from @Mohammad Parwez:

You can still find a few properties in my Triad NC area where a few properties get closer to the 1% rule.

However, most of the properties are now in the 0.6-0.8% range. 

For example, you can get a 3 bed/2 bath SFH in a decent neighborhood for about 270-300k that can generate a rent of about 2000-2300/m.

Thanks

Mohammad Parwez

336-999-9086

https://mohammadrealtor.com

 People really invest 300k to make less then 6% net? WOW, I really am spoiled. 

I have some who invest for negative cash-flow. They don't care about the cash-flow, The write-off's are profitable and there looking at the out-sized equitable gains. 

Different persons, different situations, different benefits. 

[Patrick Drury]

@Saad D.
It's definitely still doable in midwestern markets like Columbus and Cleveland 

[James Hamling]

Quote from @Account Closed:

Quote from @James Wise:

Quote from @Michael P.:

No longer a rule, just a ghost in the past, A relic of days when profits were vast.

Now we chase dreams in a world redefined, Where rules once golden are left far behind.

What can be unburdened by what has been.

and we shall tax your unrealized capital gains.

I can't wrap my head around believing that has any seriousness in it what so ever. If there was Wall Street and every billionaire would be uniformed against her and pouring out the war chests to combat her. It would effectively end everything they do. 

Think every CEO who takes pay in stock, would get nailed hard for doing a good job and raising share value. 

Musk would be F'd. Buffet, Bezos, the list goes on and on. 

And how can one logistically do such, it makes no sense. Is there a certain calendar day they peg that value on? Ok, so what, we all just sell the day before and buy back the day after? It's madness. Could you imagine the hell that would wreak on international markets! yeah, quick way to assure the rest of world hates you for sure. New world holiday, annual market crash day, lol. 

[Peter W.]

My rule of thumb is the 1% rule is not good enough.   So I look for something a tad better than the 1% rule.  Last two I bought were 1.2% and 1.1%, both will end up being close to cashflow neutral.

[Bob Stevens]

Quote from @James Hamling:

Quote from @Bob Stevens:

Quote from @Mohammad Parwez:

You can still find a few properties in my Triad NC area where a few properties get closer to the 1% rule.

However, most of the properties are now in the 0.6-0.8% range. 

For example, you can get a 3 bed/2 bath SFH in a decent neighborhood for about 270-300k that can generate a rent of about 2000-2300/m.

Thanks

Mohammad Parwez

336-999-9086

https://mohammadrealtor.com

 People really invest 300k to make less then 6% net? WOW, I really am spoiled. 

I have some who invest for negative cash-flow. They don't care about the cash-flow, The write-off's are profitable and there looking at the out-sized equitable gains. 

Different persons, different situations, different benefits. 

 Wow, interesting, thanks 

[Bob Stevens]

Quote from @James Hamling:

Quote from @Bob Stevens:

Quote from @Henry Lazerow:

In higher crime areas you can still find 1% but it comes with less actual rent collection/costlier issues. 

 NOT if you know what you're doing and have a team in place. I get 2% on avg for all my personals, NO not war zones. All in 75k, rent 1500- 1600 All in 90k, rents 1800- 2k, 

I have to 2nd Bob here. 

Just because you're not finding them doesn't mean they don't exist. I have a market, NOT a "war zone" that I can consistently hit 1%+. About double price point to Bob's market but point is, YES it still exists. 

For last many months, if not 2yrs+ people been howling how "there's no deals anymore"..... And some of us been replying back yes there is, just where they are, how to get them, has changed a bit and it's no longer as simple as closing your eyes and randomly throwing darts at a MLS map and buying whatever. yes, those days are long gone but if your willing to roll-up the sleeves and get professional at it, there is "deals" all over the place, you just gotta get skilled on how to find them, tap them, monetize them.

Hell, someone sent me an update today on sec8 payment standards in MSA where sec8 is paying dang near $4kmnth! It ain't the '80's anymore, sec8 tenant is a-changing. Learn that space and you'll be drowning in opportunity. 

wow 4k, nice!! I just got 900 for a 1 br ( my 7 unit building) in the " hood" at 30k all in , So nice ROI, 1700 for a 4 br all in 75k, ! Whoop LOL

[David Ramirez]

It depends on your market. Here in Florida, if you are not doing direct to seller marketing, I would say yes, you are probably not going to get a property at the 1% rule. We still get a bunch that work at the 1% rule, but we are direct to seller and off-market.

[Chad Shultz]

One of the issues, which helps to grow the problem is there are too many television programs on investing/flipping, etc.  When these scripted, fake, programs don't tell the true story of how the projects go, everyone and their brother want to jump in and make some of the millions, getting their piece of the glory that is television life.  With all these people jumping in, the problem gets larger by unscrupulous individuals who start selling, and up-selling, so called "Real Estate Training Courses."  Many of these courses get very expensive and lead to nowhere for the average person.  Most of these people fail, lose money, get sour on real estate, etc.  However, their presence in the markets raises the entry point for everyone and the actual investors need to start breaking their "rules" in order to be competitive.  At some point, the scales will tip and then everyone left wants/needs to jump off in order not realize coming loses.

It is a cycle, like most things in life, but one that can be avoided if you stick to what actually works rather than taking unnecessary risk just to force a deal.

[James Hamling]

Quote from @Bob Stevens:

Quote from @James Hamling:

Quote from @Bob Stevens:

Quote from @Mohammad Parwez:

You can still find a few properties in my Triad NC area where a few properties get closer to the 1% rule.

However, most of the properties are now in the 0.6-0.8% range. 

For example, you can get a 3 bed/2 bath SFH in a decent neighborhood for about 270-300k that can generate a rent of about 2000-2300/m.

Thanks

Mohammad Parwez

336-999-9086

https://mohammadrealtor.com

 People really invest 300k to make less then 6% net? WOW, I really am spoiled. 

I have some who invest for negative cash-flow. They don't care about the cash-flow, The write-off's are profitable and there looking at the out-sized equitable gains. 

Different persons, different situations, different benefits. 

 Wow, interesting, thanks 

Example. One is a tech engineer, running a team. Clears in 400's. Tax's hit him hard, real hard. First fed, than state. So for him, paper losses are good. At worst, it's deciding who get's that $ that he won't see regardless, at best it can notch him down a tax bracket. 

So sticks to path of progress, real top shelf A quality properties. With plan to liquidate around yr 5-7, 1031 those gains to pyramid the equity growth. 

Acquires a new one via capital injection annually, and with the pyramiding, after 20yrs of this will be siting on a nice holdings that is planned to fund kids university tuitions via rents at that time, which around yr17 we will start deploying into assets with more of that cash-flow focus. 

Playing the long game, it's not for those chasing rainbows, definently for the LT planned methodical focus. 

Also, add in depreciation benefits also, those add up fast. 

And to any wondering, no, I don't loose a wink of sleep over using legal tax strategies. yes, I think those who can utilize it have earned it and don't owe a thing to anyone else. When politicians stop becoming multi-millionaires via civil service jobs than I will start to give a dang. Or, how about they get paid the median income for the areas they represent. 

[Matthew Hull]

How are you filtering opportunities down to a manageable list if the 1% rule isn’t cutting it?