1% Buy & Rent Rule?

Question

i forgot where on BP i read this mentioned, but is it some sort of rule?

if i remember correctly, the author said something to the effect that bare minimum for return on a good rental property anywhere would be at very least 1% monthly of the buy+fix price?

ie if i were to purchase a duplex fixerupper here in socal (or wherever) for 400k, spend 100k on materials/labor renovating it i better be sure i will get $2,500/mo per unit in order to meet the 1% 'rule'?

Philippe Laurin · Answer

The 1% rule (or the 2% rule)  is a rule of thumb. A quick way to gauge the cashflow potential of a property.

In general, if a property passes the 2% rule, there is a good chance that it will have positive cash flow. If it's below 1%, it might be harder to cash flow. In both cases, there is no guarantee either way. It's very much dependent on the type of neighborhood, as well as the condition of the property.

Just to give an example, a brand new construction in a class A neighborhood stands a good chance of having positive cash flow, because maintenance costs, capex, tenants turnover and vacancy will all be very low. At the other end of the spectrum, a beat up house in a poor neighborhood will have higher relative costs for these items. Also, some costs are fixed no matter the price of the house. A new roof will cost the same whether you bought a 30K house or a 300K house.

So to sum up, don't buy anything before first running the full numbers for the property, and always err on the cautious side :)

Ben Andrews · Answer

@Neil  G. Yes, that is the 1% rule. However, it's just a starting point for analyzing a property. Take a look at this blog post by @J  Scott. He does a great job of breaking down property analysis.

http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/

Mercedes Cantero · Answer

Hi @Neil G.,

Also I would consider to ask for the last two years of profit and loss statements of the property if it has been rented before. Once I know the net income of the properties, I should have an idea of the work made as well. But as you say you are going to make repairs this data is not so important here, it might be useful for rentals "ready to go".

Matt R. · Answer

@Neil  G. You got it right. You can find dozens of 1%ers in California on loopnet. Usually in the inland areas but a few coastal still around way up north that is. Good luck with your search!

Ali Boone · Answer

@Ben Andrews

Ah! Yes, good catch. I read too fast :)

Hahaha....yeah, still a moot point for CA.

Ben Andrews · Answer

Just so there's no confusion, in his original post, he said $2,500/month per unit. And it's a duplex he's referring to, so it is $5,000/month total rent. =)

However, as you say, finding that kind of deal is another story!

Ali Boone · Answer

No, you'd need to get $5,000/month in rent on a $500,000 property to meet the 1% rule. And trust me, that won't happen in LA.

Alex Craig · Answer

1% is a good starting point, but you should consider other factors too.  Namely the area and house.  Typically the better the area, the harder that 1% rule is to obtain.  Also, a house that rents for $895 and sells for $79,000 may not be as good as a investment as a house right next door that is selling for $85,000 if the higher priced home has features that give the house more rentability, has a new roof and or new HVAC system.  Houses in suburbs may not have the 1% rule, but the property taxes may be cheaper then the city is next to, thus making cash flow better.  It is good to look at metrics such as this, but like I tell my investors, not to over a focus on an area.  A 12% return house vs a 10% return house is a tree falling over in the backyard away from having a smaller return or one bad tenant.  Also, when analyzing a house and its #'s, remember, you can fix the house, you can fix the tenant and you can fix the Property Manager, but you can't fix the area.

JD Martin · Answer

Don't base anything strictly off rules you read anywhere. You have to do your own market and cash analysis. I do use a 1% rule as a "quick and dirty" method where I live if I'm looking at a place for sale and guesstimating how much I would be willing to pay for the property and if it would rent for at least 1%. But hard money is a lot different than ratios, and the further you go up that ladder the less important ratios are than what you are realizing on paper. In the price range I look at (less than 60k), anything that can't pull at least 1% after rehab is either a total basket case or in a very bad area. If you were looking at houses for 600k, there might be a local market cap of say $4-5k in rent, but the property could still make sense and have excellent cash flow depending on your payment method & amount of equity, chances for future appreciation, tax considerations, etc.

Regarding the 2% "rule" - I don't really buy into it, unless you are talking about really low end stuff and leaving out some expenses. I am sure there are opportunities here and there to make that kind of return, but I believe that to be the exception and not the rule. I am sure I will be gunned down by some gurus here that are pulling that all day on everything they own, but I think if you are getting 1% per month or better on your investment, after expenses, you are probably doing very well - that is probably better than 12% annual return after tax considerations (depreciation, etc), and that outpaces just about any safe or risky investment vehicle available.

Do your own analyses and don't listen to gurus!

1% Buy & Rent Rule?

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