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Updated over 4 years ago on . Most recent reply

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Tyler D.
99
Votes |
219
Posts

Disregarding the 1% rule?

Tyler D.
Posted

I'm looking at property in the state of Oregon, which has had amazing appreciation but poor (starting) cashflow. Basically the only properties I have found that break 1% are in rural areas, or dumps, or both.

I'm looking specifically at fourplexes to owner-occupy, and at best I've found something that hit 0.8% so far, but most hover between 0.6-0.7%. I'm wondering if it would be a poor investment to disregard the 1% rule in this case? I'd like to start accumulating properties in my area (by owner occupying, then moving out a year later), but only if it makes sense financially.

Basically, I want to know if:

1) Is it sound strategy to ignore the 1% rule in areas with high appreciation, and

2) Is it alright to ignore the 1% rule for fourplexes? (1 roof, lower costs, etc).

Most Popular Reply

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1,192
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Joseph Cacciapaglia
  • Real Estate Agent
  • San Antonio, TX
1,713
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1,192
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Joseph Cacciapaglia
  • Real Estate Agent
  • San Antonio, TX
Replied

When I started investing, I was way too focused on cash flow, and it led me to less than desirable markets and assets. I was cash flowing fine, but not building any real wealth. It took me longer than it should have, but I finally learned from my more successful clients. Most of them disregard the 1% rule. They're looking for properties with strong rent growth and appreciation. Areas like that don't usually provide great cash flow day one, but often have a higher total return over your hold period. They also tend to cash flow very well in years 3+. In my market, you usually see those properties sell closer to 0.8%. If you look at where your returns come from, cash flow usually makes up a small percentage of the total return. By forcing every deal to hit an arbitrary cash flow hurdle, you inadvertently rule out some of the better investments. 

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