The 1% rule does not necessarily work in areas with high taxes

[Joe S.]

The 1% rule does not necessarily work in areas with high taxes. Investors in states/counties with high property taxes are finding this out the hard way.

[Dan H.]

Some thoughts on 1% rule:

• As OP points out, it does not guarantee cash flow. High property tax, HOA, Melo Roos, insurance or 100% LTV financing are some of the items that can cause 1% properties to have negative cash flow.
  In any given market, the higher the rent to value ratio, typically the more risk associated with the property.  Class D areas have higher rent to value ratios than class A areas.  
  Rent to value ratios are best used to compare expected cash flow on similar properties (similar class, expected expenses, quality of tenant, expected vacancy, etc).  It has low value if used to compare vastly different properties (such as comparing a class A area property to a class D area property). 
  

None of the rules such as 1% rule (rent ratio - used to be the 2% rule), 50% rule (expenses not including P&I), 70% rule (cost to ARV) are a substitute for a thorough pro forma.

Of the rules, I use the 50% rule most often.

good luck