Downside of the 1% rule...

[John Williams]

Here's why I don't like the 1% rule...

A buy-and-hold investor should think long-term. 

The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)

The 1% rule stops a lot of folks from getting started. 

Think big picture.

Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!

[Kevin Sobilo]

@John Williams, a few comments:

1. IMO the 1% is just rule of thumb for filtering potential deals. If you are looking for cash-flow, you can apply the 1% rule and scan through many deals and then only focus on ones that have potential cash-flow. That's about all its good for.

2. Cash-flow is KING! Yes, appreciation has the potential help you hit the jackpot and make you more wealth. However, cash-flow is better for a number of reasons. Perhaps the most important of which is that its more predictable and more CONTROLLABLE. Except for forced appreciation, you have no control over appreciation after you buy a property whereas you can make decisions along the way to improve your cash-flow. Raise rents, reduce expenses (shop insurance, appeal taxes, refinance, etc).

3. You mention tax benefits. That is where cash-flow shines as you have an income to use those tax benefits with.

4. Appreciation is EXPENSIVE! Yes, it costs you money!!! Its locked up in the equity of the property and it will cost you money to touch it. If you sell, you pay closing costs, commissions, taxes (including depreciation recapture), etc. Even if you refinance, you have origination costs, appraisals, etc.

So, while cash-flow is tax advantaged aka CHEAP; appreciation is EXPENSIVE!

5. Most beginning investors need to and should invest for cash-flow. Most small time investors can't afford the risk to buy and hold a property that doesn't make money in HOPES that it appreciates enough. In additional new investors are more likely to understand cash-flow than how to predict appreciation. 

[Joe Villeneuve]

The problem with the 1% Rule is it tells you nothing of value.

[Kevin Sobilo]

Quote from @Joe Villeneuve:

The problem with the 1% Rule is it tells you nothing of value.

I don't understand that viewpoint. Do you remove the roof from your houses because roofs do not prevent flooding? Why complain about what something isn't. When you evaluate something you evaluate it for what it is and what its intended to do.

The 1% rule is simply a rule of thumb type filter.

If you know that a 2BR single family rental averages $1000/month in your market and someone tells you they have a good deal for you on one for $175k how much time are you going to spend analyzing it?

With the 1% rule, NONE! You have just saved 15 or 30 minutes or whatever time you would have put into analyzing it.

That's all the 1% rule does, is help you sort out what MIGHT be a deal with analyzing and ignoring the rest. It saves you some time, that's all BUT time is pretty valuable stuff.

For a newbie, that rule of thumb is even more important to help them make sense of things and allow them to focus more and not be overwhelmed.

[David Krulac]

1% is just a rule of thumb, no more.  For example it does not consider who pay the utilities, obviously if the LL pays all the utilities, the net is lower.  If the insurance is higher, like in a flood zone, or hurricane zone the net will be lower.  It the accessment is too high and the real estate taxes as a result are too high, the net will be less.  The 1% rule does not consider any expenses, especially ones that are high.  The 1% rule does not consider the condition of the property and is very limited.  Look at it if you want, but if that is all you look at, you are short changing yourself.

[Joe Villeneuve]

Quote from @Kevin Sobilo:

Quote from @Joe Villeneuve:

The problem with the 1% Rule is it tells you nothing of value.

I don't understand that viewpoint. Do you remove the roof from your houses because roofs do not prevent flooding? Why complain about what something isn't. When you evaluate something you evaluate it for what it is and what its intended to do.

The 1% rule is simply a rule of thumb type filter.

If you know that a 2BR single family rental averages $1000/month in your market and someone tells you they have a good deal for you on one for $175k how much time are you going to spend analyzing it?

With the 1% rule, NONE! You have just saved 15 or 30 minutes or whatever time you would have put into analyzing it.

That's all the 1% rule does, is help you sort out what MIGHT be a deal with analyzing and ignoring the rest. It saves you some time, that's all BUT time is pretty valuable stuff.

For a newbie, that rule of thumb is even more important to help them make sense of things and allow them to focus more and not be overwhelmed.

If the 1% Rule is just a "rule of thumb", it's waste of time.  Making decisions based on "rule of thumb" analysis isn't analysis, it's guessing.  Besides, I don't analyze properties, I analyze markets.  Properties are pieces of markets.  When you analyze a market properly (1% Rules aren't properly), you're analyzing all the properties in that market at the same time.
It's even more dangerous for newbies to use any Rule of thumb.
Rules of thumb are nothing but shortcuts, which seems to be the growing method of doing anything now.

[Kevin Sobilo]

Quote from @Joe Villeneuve:

Quote from @Kevin Sobilo:

Quote from @Joe Villeneuve:

The problem with the 1% Rule is it tells you nothing of value.

I don't understand that viewpoint. Do you remove the roof from your houses because roofs do not prevent flooding? Why complain about what something isn't. When you evaluate something you evaluate it for what it is and what its intended to do.

The 1% rule is simply a rule of thumb type filter.

If you know that a 2BR single family rental averages $1000/month in your market and someone tells you they have a good deal for you on one for $175k how much time are you going to spend analyzing it?

With the 1% rule, NONE! You have just saved 15 or 30 minutes or whatever time you would have put into analyzing it.

That's all the 1% rule does, is help you sort out what MIGHT be a deal with analyzing and ignoring the rest. It saves you some time, that's all BUT time is pretty valuable stuff.

For a newbie, that rule of thumb is even more important to help them make sense of things and allow them to focus more and not be overwhelmed.

If the 1% Rule is just a "rule of thumb", it's waste of time.  Making decisions based on "rule of thumb" analysis isn't analysis, it's guessing.  Besides, I don't analyze properties, I analyze markets.  Properties are pieces of markets.  When you analyze a market properly (1% Rules aren't properly), you're analyzing all the properties in that market at the same time.
It's even more dangerous for newbies to use any Rule of thumb.
Rules of thumb are nothing but shortcuts, which seems to be the growing method of doing anything now.

I'm sorry, but none of that makes sense to me.

1. EVERYONE makes decisions based on rules of thumb! I think you are getting confused about WHICH decision its to be used for.

You use it to decide whether to analyze a property deeper.

If I gave you a list of 100 deals on a sheet of paper with just a few basic pieces of information you could apply the 1% rule and eliminate the vast majority of them and then only focus on a small number to consider evaluating further. THAT is the decision its useful for NOT a decision to purchase.

2. The way you worded your response sounds like after you analyze a market and decide you want to invest you will buy ANY property within that market without having to think about it. I don't think that is what you meant.

3. Shortcuts are good! That's how things get done more efficiently.

4. You are using rules of thumb right now every minute of the day! LITERALLY!

For example, you look at the clock and believe there are 60 seconds in a minute, 60 minutes in an hour, 24 hours in a day and 365 days in a year.

However, that's only a rule of thumb because it isn't accurate! Its a rule of thumb SHORTCUT we use to make DECISIONS every day of our lives! That's why they keep having to adjust the clocks with leap year and at other times as well because these rules of thumb are not perfectly accurate. They are just good enough to be useful in day to day life. 

[Joe Villeneuve]

Quote from @Kevin Sobilo:

Quote from @Joe Villeneuve:

Quote from @Kevin Sobilo:

Quote from @Joe Villeneuve:

The problem with the 1% Rule is it tells you nothing of value.

I don't understand that viewpoint. Do you remove the roof from your houses because roofs do not prevent flooding? Why complain about what something isn't. When you evaluate something you evaluate it for what it is and what its intended to do.

The 1% rule is simply a rule of thumb type filter.

If you know that a 2BR single family rental averages $1000/month in your market and someone tells you they have a good deal for you on one for $175k how much time are you going to spend analyzing it?

With the 1% rule, NONE! You have just saved 15 or 30 minutes or whatever time you would have put into analyzing it.

That's all the 1% rule does, is help you sort out what MIGHT be a deal with analyzing and ignoring the rest. It saves you some time, that's all BUT time is pretty valuable stuff.

For a newbie, that rule of thumb is even more important to help them make sense of things and allow them to focus more and not be overwhelmed.

If the 1% Rule is just a "rule of thumb", it's waste of time.  Making decisions based on "rule of thumb" analysis isn't analysis, it's guessing.  Besides, I don't analyze properties, I analyze markets.  Properties are pieces of markets.  When you analyze a market properly (1% Rules aren't properly), you're analyzing all the properties in that market at the same time.
It's even more dangerous for newbies to use any Rule of thumb.
Rules of thumb are nothing but shortcuts, which seems to be the growing method of doing anything now.

I'm sorry, but none of that makes sense to me.

1. EVERYONE makes decisions based on rules of thumb! I think you are getting confused about WHICH decision its to be used for.

You use it to decide whether to analyze a property deeper.

If I gave you a list of 100 deals on a sheet of paper with just a few basic pieces of information you could apply the 1% rule and eliminate the vast majority of them and then only focus on a small number to consider evaluating further. THAT is the decision its useful for NOT a decision to purchase.

2. The way you worded your response sounds like after you analyze a market and decide you want to invest you will buy ANY property within that market without having to think about it. I don't think that is what you meant.

3. Shortcuts are good! That's how things get done more efficiently.

4. You are using rules of thumb right now every minute of the day! LITERALLY!

For example, you look at the clock and believe there are 60 seconds in a minute, 60 minutes in an hour, 24 hours in a day and 365 days in a year.

However, that's only a rule of thumb because it isn't accurate! Its a rule of thumb SHORTCUT we use to make DECISIONS every day of our lives! That's why they keep having to adjust the clocks with leap year and at other times as well because these rules of thumb are not perfectly accurate. They are just good enough to be useful in day to day life. 

OK.
#1:  Rules of thumb will eliminate good deals as well as bad.  Just because a property doesn't measure up to a rule of thumb doesn't mean it's a bad deal.  It takes a full analysis.
#2:  I analyze a market to decide what criteria makes a property in that market good.  When a property comes available that matches that criteria, I move on it.
#3:  Short cuts are not efficient.  Speed isn't efficiency.  It's the opposite.
#4:  Your clock example isn't a Rule of Thumb, it's an example of facts.  Not the same thing. Rules of thumb, used as shortcuts, are just lack of patience at work.

[Kevin Sobilo]

OK.

#1:  Rules of thumb will eliminate good deals as well as bad.  Just because a property doesn't measure up to a rule of thumb doesn't mean it's a bad deal.  It takes a full analysis.
#2:  I analyze a market to decide what criteria makes a property in that market good.  When a property comes available that matches that criteria, I move on it.
#3:  Short cuts are not efficient.  Speed isn't efficiency.  It's the opposite.
#4:  Your clock example isn't a Rule of Thumb, it's an example of facts.  Not the same thing. Rules of thumb, used as shortcuts, are just lack of patience at work.

1. Yes, a rule of thumb COULD eliminate a good deal if not applied correctly. However, that is the nature of rules of thumb. They have HUGE benefits and small potential drawbacks. So, while imperfect they overall benefit you.

2. That's great for you! However, the people who use rules of thumb don't have sophisticated software that can analyze deeply thousands of potential deals every day!

So, for everyone else who cannot possibly evaluate every deal in detail. That's great. 

BTW. You just said the opposite of what you originally said. Now you are looking to see if deals are within your buy box which is analyzing deals.

3. Doing something faster doesn't mean increasing SPEED! If you are doing something with less effort that is "doing it faster" but not "working faster". That is what a rule of thumb does it allows you to accomplish MORE with LESS effort therefore getting more done faster (time wise).

4. My clock example is EXACTLY a rule of thumb because the time constructs we use (second, minute, hour, day, year, etc) are NOT "facts". They are rules of thumb we use to function day to day because the FACTS are too needlessly complicated to use to make every decision in life. The time measurements we use are a "shortcut". 

5. BTW, your "criteria" are likely just "rules of thumb" you developed (which is great!) and likely has something akin to the 1% baked into it somewhere. So, you can't say you don't believe in "shortcuts" and also say that you use these criteria because THAT is a SHORTCUT! Do, the work, analyze every deal manually!!! lol

[Trevor Finn]

You make a great point—focusing solely on the 1% rule can be limiting, especially for long-term investors. While it’s a helpful quick filter, the bigger picture—appreciation, tax benefits, loan paydown, and compounding growth—often tells a much better story over 5-10 years.

The key is balancing cash flow and long-term gains. If a deal aligns with your financial goals and makes sense in the broader context, don’t let rigid rules hold you back. Taking action with a clear plan is what builds wealth. Great advice—thanks for sharing @John Williams!

[Jake Andronico]

It doesn't tell you anything about a massively important metric.... EXPENSES. 

It can be a solid starting point, but has become much more unrealistic. 

There are a lot of forum posts in here about people only wanting the 2% rule...

Market conditions always curb and accentuate expectations.

[Peter W.]

Quote from @John Williams:

Here's why I don't like the 1% rule...

A buy-and-hold investor should think long-term. 

The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)

The 1% rule stops a lot of folks from getting started. 

Think big picture.

Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

[Joe Villeneuve]

Quote from @Kevin Sobilo:

OK.

#1:  Rules of thumb will eliminate good deals as well as bad.  Just because a property doesn't measure up to a rule of thumb doesn't mean it's a bad deal.  It takes a full analysis.
#2:  I analyze a market to decide what criteria makes a property in that market good.  When a property comes available that matches that criteria, I move on it.
#3:  Short cuts are not efficient.  Speed isn't efficiency.  It's the opposite.
#4:  Your clock example isn't a Rule of Thumb, it's an example of facts.  Not the same thing. Rules of thumb, used as shortcuts, are just lack of patience at work.

1. Yes, a rule of thumb COULD eliminate a good deal if not applied correctly. However, that is the nature of rules of thumb. They have HUGE benefits and small potential drawbacks. So, while imperfect they overall benefit you.

2. That's great for you! However, the people who use rules of thumb don't have sophisticated software that can analyze deeply thousands of potential deals every day!

So, for everyone else who cannot possibly evaluate every deal in detail. That's great. 

BTW. You just said the opposite of what you originally said. Now you are looking to see if deals are within your buy box which is analyzing deals.

3. Doing something faster doesn't mean increasing SPEED! If you are doing something with less effort that is "doing it faster" but not "working faster". That is what a rule of thumb does it allows you to accomplish MORE with LESS effort therefore getting more done faster (time wise).

4. My clock example is EXACTLY a rule of thumb because the time constructs we use (second, minute, hour, day, year, etc) are NOT "facts". They are rules of thumb we use to function day to day because the FACTS are too needlessly complicated to use to make every decision in life. The time measurements we use are a "shortcut". 

5. BTW, your "criteria" are likely just "rules of thumb" you developed (which is great!) and likely has something akin to the 1% baked into it somewhere. So, you can't say you don't believe in "shortcuts" and also say that you use these criteria because THAT is a SHORTCUT! Do, the work, analyze every deal manually!!! lol

My criteria isn't a Rule of Thumb.  My criteria is a specific set of numbers with dollar signs in front, not percentages behind.  You don't understand what I'm saying regarding Market Analysis, which is understandable since it would be hard to explain in this limited format.

[Joe Villeneuve]

Quote from @Peter W.:

Quote from @John Williams:

Here's why I don't like the 1% rule...

A buy-and-hold investor should think long-term. 

The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)

The 1% rule stops a lot of folks from getting started. 

Think big picture.

Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

The Market Analysis IS the screening rule.

[Mackay Oakey]

I get the sentiment for sure. I find it so much more valuable to calculate expected revenues and expenses associated with the property and go from there. Plus it's a great exercise to ensure you understand each step of the deal, and if there's anything you're missing--something new to learn as well!

[Jose Remor]

Quote from @Kevin Sobilo:

@John Williams, a few comments:

1. IMO the 1% is just rule of thumb for filtering potential deals. If you are looking for cash-flow, you can apply the 1% rule and scan through many deals and then only focus on ones that have potential cash-flow. That's about all its good for.

2. Cash-flow is KING! Yes, appreciation has the potential help you hit the jackpot and make you more wealth. However, cash-flow is better for a number of reasons. Perhaps the most important of which is that its more predictable and more CONTROLLABLE. Except for forced appreciation, you have no control over appreciation after you buy a property whereas you can make decisions along the way to improve your cash-flow. Raise rents, reduce expenses (shop insurance, appeal taxes, refinance, etc).

3. You mention tax benefits. That is where cash-flow shines as you have an income to use those tax benefits with.

4. Appreciation is EXPENSIVE! Yes, it costs you money!!! Its locked up in the equity of the property and it will cost you money to touch it. If you sell, you pay closing costs, commissions, taxes (including depreciation recapture), etc. Even if you refinance, you have origination costs, appraisals, etc.

So, while cash-flow is tax advantaged aka CHEAP; appreciation is EXPENSIVE!

5. Most beginning investors need to and should invest for cash-flow. Most small time investors can't afford the risk to buy and hold a property that doesn't make money in HOPES that it appreciates enough. In additional new investors are more likely to understand cash-flow than how to predict appreciation. 

Totally agree! Nothing else to add.

[Dan H.]

Why i do not like 1% rule

- In virtually every market, the highest rent to value ratio is in the lower class area.   Because of the quality of tenant in these areas, higher rent ratios will produce lower cash flow than higher class areas.

- nationally, the highest rent to value ratios are in areas with poor rent growth and poor appreciation.  This implies the higher ratio areas actually produce lower cash flow over long holds.

- it does not forecast rent growth or appreciation into the calculation.

Those are not areas i desire to invest.  I would rather invest in an area that has great rent growth outlook than a place that meets the 1% rule but has poor rent growth.   Note virtually all areas meeting 1% rent ratio has poor historical ling term rent growth.  

Good luck

[John Williams]

Quote from @Peter W.:

Quote from @John Williams:

Here's why I don't like the 1% rule...

A buy-and-hold investor should think long-term. 

The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)

The 1% rule stops a lot of folks from getting started. 

Think big picture.

Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

 Would I buy the 5 homes with negative cash flow? It depends! If you budget the negative cash flow over the course of the hold period and have reserves set aside to fill the gap, there is no problem (assuming your investment meets your target appreciation rates - I understand there is no guarantee there). 

For example, you can buy 5 new construction homes at great price points in my market that would be perfect for this strategy. They certainly do not meet the 1% rule and they may be slightly negative cash flow. However, you'll minimal capex/maintenance/vacancy and the overall return after 5 years could be very strong.

[Peter W.]

Quote from @John Williams:

Quote from @Peter W.:

Quote from @John Williams:

Here's why I don't like the 1% rule...

A buy-and-hold investor should think long-term. 

The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)

The 1% rule stops a lot of folks from getting started. 

Think big picture.

Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

 Would I buy the 5 homes with negative cash flow? It depends! If you budget the negative cash flow over the course of the hold period and have reserves set aside to fill the gap, there is no problem (assuming your investment meets your target appreciation rates - I understand there is no guarantee there). 

For example, you can buy 5 new construction homes at great price points in my market that would be perfect for this strategy. They certainly do not meet the 1% rule and they may be slightly negative cash flow. However, you'll minimal capex/maintenance/vacancy and the overall return after 5 years could be very strong.

We'll end up agreeing to disagree.  To me, if you aren't at least maintaining 0 cash flow, you're betting too much on appreciation to the investment work.  For instance, if I buy a house 20% down, 5% closing prep costs where the rent matches the mortgage, interest and tax and assume a 5% rent growth and appreciation, I'm expecting an 11% total return which is just not good enough for the hassle involved.  That's about what I'll get in the stock market plus I'll be liquid (as opposed to underwater the first couple of years) and it's just push button.  Real estate needs to make at least 15% to make the effort worthwhile and have a chance for >20%.

 I buy things with 0 excepted cash flow after maintenance, vacancy, and capex savings.  Ended up with negative cash flow due to replacing an air conditioner.  I find 

[Mackay Oakey]

You bring up a great point here too. If you're putting 20% down and getting less than the stock market, may not be the right move. I have high confidence in future appreciation, but relying on it is certainly risky.@Peter W.

[Jay Hinrichs]

Quote from @Dan H.:

Why i do not like 1% rule

- In virtually every market, the highest rent to value ratio is in the lower class area.   Because of the quality of tenant in these areas, higher rent ratios will produce lower cash flow than higher class areas.

- nationally, the highest rent to value ratios are in areas with poor rent growth and poor appreciation.  This implies the higher ratio areas actually produce lower cash flow over long holds.

- it does not forecast rent growth or appreciation into the calculation.

Those are not areas i desire to invest.  I would rather invest in an area that has great rent growth outlook than a place that meets the 1% rule but has poor rent growth.   Note virtually all areas meeting 1% rent ratio has poor historical ling term rent growth.  

Good luck

exactly the 1% and greater rule steers ( especially first time investors who think that is the metric they have to hit) into what is almost always higher risk rental areas. And by higher risk I mean higher risk of tenant issues  generally older homes with a lot of long term differed maintenance. limited opportunities for any REAL appreciation .  The whole idea of real estate prices for risk just gets swept under the rug basically.

[Jay Hinrichs]

Quote from @John Williams:

Quote from @Peter W.:

Quote from @John Williams:

Here's why I don't like the 1% rule...

A buy-and-hold investor should think long-term. 

The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)

The 1% rule stops a lot of folks from getting started. 

Think big picture.

Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

 Would I buy the 5 homes with negative cash flow? It depends! If you budget the negative cash flow over the course of the hold period and have reserves set aside to fill the gap, there is no problem (assuming your investment meets your target appreciation rates - I understand there is no guarantee there). 

For example, you can buy 5 new construction homes at great price points in my market that would be perfect for this strategy. They certainly do not meet the 1% rule and they may be slightly negative cash flow. However, you'll minimal capex/maintenance/vacancy and the overall return after 5 years could be very strong.

To discuss other side of this thought process on new builds.. I did this in the MS market and while the advantages you pointed out were true.. markets that have slow appreciation and or areas where builders can keep building for low dollar amounts like the mid west. I found my new builds 10 years later were now used.. And to exit I had to make them compete with the new builds of the day.. So basically I had to put 15 to 30k into each one just to get current market value and compete with the new builder grade rentals being built.. So for me the ONLY advantage was the GOZONE tax bene's i was able to get when I bought them.. that was the Gulf opportunties act post katrina. most current investors I am sure never heard of it.. But if it was not for those bene's these would have been poor investments long term with very little exit profit by the time one would have to pay recapture and do fix up work. Go zone sunset recapture that was part of the benefit so that would not exits going forward.

I know on bp we have a long standing  whats better appreciation or cash flow.. and I am in the appreciation camp one needs that if one is going to exit with any kind of real profit.. Or one needs to be a lifer  IE never sell hand down to kids.

[Dan H.]

Quote from @Peter W.:

Quote from @John Williams:

Quote from @Peter W.:

Quote from @John Williams:

Here's why I don't like the 1% rule...

A buy-and-hold investor should think long-term. 

The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)

The 1% rule stops a lot of folks from getting started. 

Think big picture.

Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

 Would I buy the 5 homes with negative cash flow? It depends! If you budget the negative cash flow over the course of the hold period and have reserves set aside to fill the gap, there is no problem (assuming your investment meets your target appreciation rates - I understand there is no guarantee there). 

For example, you can buy 5 new construction homes at great price points in my market that would be perfect for this strategy. They certainly do not meet the 1% rule and they may be slightly negative cash flow. However, you'll minimal capex/maintenance/vacancy and the overall return after 5 years could be very strong.

We'll end up agreeing to disagree.  To me, if you aren't at least maintaining 0 cash flow, you're betting too much on appreciation to the investment work.  For instance, if I buy a house 20% down, 5% closing prep costs where the rent matches the mortgage, interest and tax and assume a 5% rent growth and appreciation, I'm expecting an 11% total return which is just not good enough for the hassle involved.  That's about what I'll get in the stock market plus I'll be liquid (as opposed to underwater the first couple of years) and it's just push button.  Real estate needs to make at least 15% to make the effort worthwhile and have a chance for >20%.

 I buy things with 0 excepted cash flow after maintenance, vacancy, and capex savings.  Ended up with negative cash flow due to replacing an air conditioner.  I find 

 Most people who invest in stocks or index funds are not investing for the dividends. They are investing for the stock growth/appreciation.  However, this is virtually always unleverage investment.  

If i purchase RE at 80% down, i have 5x leverage.  In addition, if i used fixed rate financing, my biggest expense is fixed.  This typically results in improved cash flow with time.  

So unleveraged stock increases 10% annually, you make 10%.  It is significantly passive so that is 10% mostly without lifting a finger.  

Or you purchase RE at 80% LTV that appreciates 5% annually that produces a return from appreciation of 25%, has increasing cash flow outlook, and if desired can have a value add to further the appreciation. This is more work than purchasing an index fund. But the upside is typically far superior.

RE investing is work.  It requires skills to maximize returns.  It is not for everyone.

Stocks are easy.  Place an investment in an S&P index fund and watch it grow (thanks Invidia).  

I do both.  I recognize RE is more work.  My last purchase i am up ~$1m working it very part-time over the last 3 years and i have some small (for the equity position, ~3k/month) cash flow.  I also have my stock investments that grow with very little effort.  Investing in both provides some diversification of assets. 

Note in most markets, the higher the rent to value ratio, the less passive RE investing will be.  

good luck

[Lorraine Hadden]

I use the 1% rule to quickly assess if a property is likely to generate enough income to cover its costs and potentially provide a profit - it's a guideline - so, don't miss out on good investment property by being rigid when applying the "guideline" to rental properties. The rule says the monthly rent should be at least 1% of its purchase price

Remember that the rule does not consider all the costs associated with owning and operating a rental property and it's a GUIDELINE!

[John Williams]

Quote from @Peter W.:

Quote from @John Williams:

Quote from @Peter W.:

Quote from @John Williams:

Here's why I don't like the 1% rule...

A buy-and-hold investor should think long-term. 

The 1% rule doesn't matter as much if you have a 5-10 year investing horizon because it does not take into account appreciation or other benefits of holding (tax benefits, etc.)

The 1% rule stops a lot of folks from getting started. 

Think big picture.

Consider all the benefits of the investment over an extended period of time and get started! Take action! You'll thank me later!

 Would you buy 5 houses in Clarksville, which rent for less than your mortgage payment?  No, that way leads to a failed investment.  You need sufficient rental income to cover your expenses, or you bleed money.  And given that, in a major city, there are hundreds of houses put on the market weekly, you need a method to efficiently screen properties to make sure they won't bleed money before you spend time analyzing, touring them ect.  We've all had good appreciation lately, but the markets seem to be much flatter than they were.  Markets stay flat for five years and you've been bleeding cash then what?

Now you might be like Joe, know rents for a couple of neighborhoods and can quickly estimate expected cash flow from properties pretty quickly (that's what I do as well) but you still need a screening rule so you invest minimal times on properties you will never put an offer in on.  The 1% rule is a simple rule which is easy to calculate and describe.

 Would I buy the 5 homes with negative cash flow? It depends! If you budget the negative cash flow over the course of the hold period and have reserves set aside to fill the gap, there is no problem (assuming your investment meets your target appreciation rates - I understand there is no guarantee there). 

For example, you can buy 5 new construction homes at great price points in my market that would be perfect for this strategy. They certainly do not meet the 1% rule and they may be slightly negative cash flow. However, you'll minimal capex/maintenance/vacancy and the overall return after 5 years could be very strong.

We'll end up agreeing to disagree.  To me, if you aren't at least maintaining 0 cash flow, you're betting too much on appreciation to the investment work.  For instance, if I buy a house 20% down, 5% closing prep costs where the rent matches the mortgage, interest and tax and assume a 5% rent growth and appreciation, I'm expecting an 11% total return which is just not good enough for the hassle involved.  That's about what I'll get in the stock market plus I'll be liquid (as opposed to underwater the first couple of years) and it's just push button.  Real estate needs to make at least 15% to make the effort worthwhile and have a chance for >20%.

 I buy things with 0 excepted cash flow after maintenance, vacancy, and capex savings.  Ended up with negative cash flow due to replacing an air conditioner.  I find 

 Problem with the stock market is that it's outside your control to a large extent (same as betting on appreciation) and you don't get the tax benefits and leverage. You have a good point about the hassle factor though. 

[Bryan F.]

Cash flow is never going to be what your spreadsheet tells you it’s going to be. Focus on buying based on value. That’s what will make you money in the long run.