Help assessing a deal with the 1% rule

[Michael Andrews]

I've been looking for my first multifamily property and I found a fourplex that just popped up on the MLS at $330,000 getting a net rental income of $2500. Looking at the 1% rule the price is way over the rental income threshold of $250,000, so I'm wondering if there is anything redeeming about a property like this I could look at to even come close to validating that asking price?

[Cara Lonsdale]

The 1% rule is not for the type of RE you are investing in.  Someone started whispering it around BP, and now people think it is the standard for evaluating a property.  It originated with the evaluation of mobile home parks and storage facilities.  Somehow, someone started applying it to RE, and the whole thing equated to a bad game of telephone.

Throw it out.  

Now, the 50% rule for expenses is pretty solid, and is most commonly found in an evaluation tool for multi-family created by Michael Blanks.  While many properties will come in less than this when figuring expenses, the rule helps cover any unknowns and unexpecteds so that you can protect as much of your cash flow figures as possible.  Obviously, if expenses are less, your cash flow will be more.  THAT is the surprise you want, rather than figuring too close to actuals, and then have unexpected expenses that eat away your cash flow.