Why I ignored the 1% rule

[Clint G.]

I'm getting ready to purchase my second SFH rental in a booming Texas town full of new industry. This property is on the same street as my other SFH. Looking at the numbers, here's why I disregarded the 1% rule when making this call. On a side note, the market is so compressed here that finding a 1% property is very difficult because housing supply is very low in the area. Also, these are both pretty turn key properties with no rehab needed. Property 1: 3/2 @ 1,456 sq ft Purchased in May 2019 Purchase price: 167,000 with 20% down Interest Rate: 5.75% (3.75% after refi in process) PITI: 1,197 (1,037 after refi in process) Rent: 1,625 Cash Flow after expenses: 147.52 (308.00 after refi in process) Property 2: 3/2 @ 1,316 Will close in April 2020 Purchase price: 179,900 with 25% down Interest Rate: 3.625% PITI: 1,023 Rent: 1,500 (market comps) Cash Flow after expenses: 191.00 As you can see, my second property isn't even close to the 1% rule, but it cash flows better than my larger home that was purchased last year for 13k less. Why is that? INTEREST RATES! They are insanely low right now, so I'm not wasting the opportunity. Notice my first property is at a 5.75% interest rate that was bought in May last year. I'm in the process of refinancing that one at a 3.75% rate which will bring my PITI to 1,037 and will bring my cash flow to 308.00 within the next 45 days. Should cost me no money out of pocket for the refi. Like I mentioned before, both of these properties are in excellent shape with very little expense having to be put into them, so cash flow is actually much higher (for now) due to low maint costs. Neither of these properties make sense if looking strictly at the 1% rule which is why you have to consider many things when making a decision. I don't mind paying more for something if my cash flow is there....why is cash flow there? INTEREST RATES!! Also, I considered appreciation in this case as well but didn't base my purchase solely off of it. Check out that first property. I bought it at 114 a sq ft and the second one at 136 a sq ft. These properties are literally down the street from each other and are almost identical except for square footage. See the appreciation there on the first property in less than a years time???!!! INSANE! I still consider myself "new" to this although in less than a years time I've purchased two rentals, and bought, rehabbed and sold a flip house. I still have a lot to learn, so I'm open to any comments I get here. We're all learning together! My point of this post is to take advantage of interest rates while you can. We won't see this again for years and years!

[Corby Goade]

I always get a kick out of people from other parts of the country telling someone their deal is "bad" because the numbers are different than the one deal they did six years ago in Kansas. I've said this on these forums so many times it's getting boring to me....a "good" deal is specific to every market and investor. Do you think that no one buys MFH in LA because they don't meet the 2% rule? Of course not- it's just that those investors are too busy being successful to hang out here on BP. 

I work with lots of full-time, retired early, millionaire real estate investors who snatch up SFH and MFH all over the country. They've never heard of the 1% rule, they seem to be doing okay, buying up investments with their own cash and collecting rents. It's all relative. I've been investing for 20 years, quit my job after several decent deals, and I don't think I've ever bought a property that met the 1% rule, let alone 2%.