Do you use the 1% rule on your rentals in 2023?

Conner Olsen

Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes

3y

I analyze 10 deals by their rent/price ratio. Then I take the one that will hit my financial goal and I use that as my rule of thumb. During covid, that was 0.68% in my market. Every market is different and everyone's goals are different.

5 Reply

Julien J.

Investor · CO · Member since 2016 · 757 posts · 1k+ votes

3y

Never used that rules nor any rules set by the gurus and somehow build up a portfolio that allowed my to exit the corporate world.

I find those rules are an obstacles for my clients and slow them down from achieving their dreams.

Its better to come up with your own rules based on your personal goals & strategy. Then bounce them off your trusted team or seasoned investor.

3 Reply

Pete Harper

Rental Property Investor · Streetman, TX · Member since 2018 · 527 posts · 495 votes

3y

1% is a useful screen criterial for evaluating cash flow properties. It is a quick and easy way to sort through a bunch of prospective properties. If you see a $400k property that rents for $2000/month move on. It isn't going to cash flow. Don't bother running the in depth numbers because it just isn't going to cash flow positive. If however it is close to 1% then it is worth taking a closer look. June year we closed on a 10 unit complex that was 0.9% that is cash flowing nicely.

Don't believe the nay-sayers that 1% deals no longer exist. I closed on a 2%+ deal in April. Our overall portfolio average is 1.6%. In todays market you are going to look a little harder. Off-Markers deals not on the MLS. Or tertiary markets outside the major markets in the path of progress.

7 Reply

Joseph Dasmerces

Rental Property Investor · Myrtle Beach, SC · Member since 2017 · 22 posts · 12 votes

3y

Quote from @Pete Harper:

1% is a useful screen criterial for evaluating cash flow properties. It is a quick and easy way to sort through a bunch of prospective properties. If you see a $400k property that rents for $2000/month move on. It isn't going to cash flow. Don't bother running the in depth numbers because it just isn't going to cash flow positive. If however it is close to 1% then it is worth taking a closer look. June year we closed on a 10 unit complex that was 0.9% that is cash flowing nicely.

Don't believe the nay-sayers that 1% deals no longer exist. I closed on a 2%+ deal in April. Our overall portfolio average is 1.6%. In todays market you are going to look a little harder. Off-Markers deals not on the MLS. Or tertiary markets outside the major markets in the path of progress.

I agree with Pete, deals are out there just have to get creative and look outside of MLS. Also Pete makes a great point to use the 1% as a quick temp test.

2 Reply

Alecia LovelessPro Member

Member since 2019 · 3k+ posts · 2k+ votes

3y

@Noah Bacon I know the markets I like to invest in and what types of properties I am likely to find in each of those markets. I have about a 40 mile radius I invest in and there are 6 towns in that area. Some of those towns have better appreciation, some have higher growth. Some are considered more desirable to live in while some might have better schools.

When I analyze a new property I first look to make sure the numbers work. If it makes the 1% rule or greater that is a bonus. My portfolio on average currently cash flows about $200/door/month. That is average for my location. If I can find a property that will cash flow better than that after all expenses I know I have found a good deal.

The most recent one I’ve bought once it’s renovated and rented will cash flow around $330/door/month, and the one before that is cash flowing about $500/door/month and should double in value by the time I’ve owned it 6 months to close to $900K.

I think the 1% rule is still useful for consideration but not the end all be all.

Joshua Bautista

Specialist · San Diego · Member since 2023 · 98 posts · 20 votes

3y

How do you guys analyze a property? Based on what metrics?

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Robert EllisBusiness Member

Developer · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes

3y

Quote from @Alfath Ahmed:

The 1% rule is a very generic rule. It does not apply to the Columbus market where I invest and broker deals. I would consider Columbus the Seattle of the midwest. It is the tech hub where house prices are soaring. 1% rule other areas are possible but not in strong appreciating markets.

disagree there are 1% deals on the market right now my friend in Columbus Ohio. I posted about one yesterday. even in section 8 it's possible. I'd be careful making general statements about entire housing markets. COlumbus is considered an 11 county MSA: https://columbusregion.com/meet-the-region/

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2 Reply

Pete Harper

Rental Property Investor · Streetman, TX · Member since 2018 · 527 posts · 495 votes

3y

Quote from @Joshua Bautista:

How do you guys analyze a property? Based on what metrics?

BP has excellent calculators available for free in the tools section of the website. I believe you get 5 free free uses. I "borrowed" the formula's and created my own spreadsheet to quickly analyze deals. Save both your good and bad deals and you will quickly get a feel for your target market.

N Miller

Member since 2023 · 5 posts · 8 votes

3y

I wonder how many $M's of dollars the OP has invested in his own real estate empire, or is he (like most of the advice-offering "experts") offering advice with no real personal experience in the game.

Marco FioreBusiness Member

Real Estate Agent · Cincinnati, OH · Member since 2022 · 78 posts · 73 votes

3y

Like said previously, I think it is a good starting point with analyzing properties. However, there are many variables that come into play: location, low rents, Cap X costs, etc. The 1% rule is the reason why you click on the property and dive deeper, but shouldn't be the reason for purchasing it!

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Peter MckernanBusiness Member

Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes

3y

This is hard to get to in my market, and it came down from the nice days of 2009-2012 when that 2% rule was amazing and happening all the time. I do use the 1% rule and usually get a little more when doing the ADU projects for cashflow... One I am doing now, building for $190K and renting out for $2500 a month.

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2 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Quote from @Peter Mckernan:

This is hard to get to in my market, and it came down from the nice days of 2009-2012 when that 2% rule was amazing and happening all the time. I do use the 1% rule and usually get a little more when doing the ADU projects for cashflow... One I am doing now, building for $190K and renting out for $2500 a month.

So what's your cash flow then?

Karl B.

Rental Property Investor · Erie, PA · Member since 2015 · 1k+ posts · 2k+ votes

3y

In my market I go for the 2% rule. I've gotten close to 4%.

The 1% rule, 2% rule, etc is market, condition and property class dependent.

Jake AndronicoBusiness Member

Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes

3y

The 1% rule is a quick and dirty way to analyze an investment property.

Pretty much impossible in our Reno, NV market today, but a property purchased a few years ago may now be close due to appreciation of rents.

ADU's on the West Coast are interesting to get close to it or even exceed it in some scenarios. But of course, building has it's own challenges.

Much more appreciation focused out here, but with strong rents and capital placed in the correct places, over time it can be possible.

415-233-1796

Davide Formica

Real Estate Agent · Columbus, OH · Member since 2018 · 38 posts · 29 votes

3y

@Noah Bacon, as I look at properties, the 1% is an automatic mental metric that I think about most times but never rely on, especially regarding multifamily. Most important these days is the DSCR and how to increase it during that first year to maintain a healthy CoC.

Natalia Kubik-Mackowiak

Member since 2022 · 10 posts · 1 vote

3y

Depending on the quality of the neighborhood. For average quality neighborhood and not the best schools, I still can find deals close to 1%. Forget, if I am searching for better quality area/school.

Exactly for this purposes I coded Doorhacker chrome extension, so I can sort houses from highest to lowest returns and focus on analyzing only those with the best ratios:

*** Note: it covers cities I have been searching myself. But if you want me to extend coverage to any other city, just drop me a message

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Peter Mckernan:

This is hard to get to in my market, and it came down from the nice days of 2009-2012 when that 2% rule was amazing and happening all the time. I do use the 1% rule and usually get a little more when doing the ADU projects for cashflow... One I am doing now, building for $190K and renting out for $2500 a month.

So you are exceeding 1% on the structure costs only and not including any land value. I suspect there are many locations were 1% is exceeded if not counting the land value.

In addition, ADUs often add less value than they cost. This means first actual cash flow occurs after recovering the negative value which could take years. They always have capital outlay for months (sometimes many months) before any income (time value of money). Their finance terms are often worse than property acquisition. They detract something from primary structure(s) even if it is just reducing the lot allocated to primary unit but often it is more, like a garage, privacy, parking, etc.

Bob S.

Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes

3y

All of mine I never less than 2% with about 20% net cap based on cash purchases.

John MorganPro Member

Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes

3y

I have a hard time making the 1% rule. Depends on what the appreciation and what the area looks like for me. I just closed on one in Arlington, TX last Monday that was turnkey for 210k and rents for $1950. I really like the house and potential for the area so I’m ok with it. My last house before this back in March was 214k all in with rehab and rents for $2465/month with section 8. But I’m generally happy hitting close to the 1% rule here in TX.