Should 1% be on asking price or on asking price minus down paymen

[Abulele Woldulele]

Hi guys,

I have 3 questions about the 1% rule for rental properties. Is the 1% computed on the asking price or is it calculated on asking price minus down payment?

Consider the following scenario:

Asking price = selling price = 100,000

Down payment = 20% = 20,000

Base = 80,000

1% of 100,000 would be 1000

1% of 80,000 would be 800

My second question:

Is there a similar rule for residential properties?

Last question:

How do you account say $20,000 of fixing up the property to make it rentable?

[David Carte]

@Abulele Woldulele I'm going to gave to disagree with what's posted in Investopedia. First off, the 1% rule is a general rule of thumb that's supposed to help you quickly determine if a rental property is a good deal. Investopedia is on the right track saying that the rule is supposed to ensure it covers your mortgage, but it's much more than just the mortgage, it's the insurance, taxes, maintenance, etc costs that are in addition to your mortgage. Therefore, the 1% rule is applied to the entire purchase price, not just what's left after the down payment. 

Let's say a house is priced at $100,000, you decide you're feeling generous and put a down payment of $70,000, leaving only $30,000 of a mortgage. Do you think you just need to make sure your rent is $300 and you're good? Don't think so.