How Rigid is the 1% Rule

[Aric Van Iterson]

This is a question in regards to adhering to the 1% rule.  I've been looking for a home to house hack in the Baton Rouge area and I've been struggling to find anything that would come close to achieving the 1% rule.  Now I know that finding a property at a great deal and doing DIY work to boost rent would help close the gap, but how stringent should I be with this?

For instance let's consider two cases that utilize my most likely financing strategy. Case 1 is a $100,000 property that rents for $1,000/month and Case 2 is a $160,000 property that rents for $1,500/month. Case 1 meets the 1% while Case 2 falls just short at 0.9375% (I handled all that hard math for you guys). Using the FHA Mortgage Calculator on usmortgagecalculator.org at 4.375% with 10% down, Case 1 would have a monthly payment with MIP of $520 and Case 2 would be $830 with MIP. Since CapEx and maintenance costs are pretty fixed (a roof isn't cheaper to replace just because the house is cheaper), let's assume I put aside $100/month for repairs and $200/month for CapEx for both cases. So, before considering taxes, insurance, and vacancy, Case 1 is $820/month while Case 2 is $1130/month. If you add in some estimated values for those costs, Case 1 actually cash flows -$50/month while Case 2 achieves an unimpressive, yet positive cash flow of $110/month.

So, although 1% is nice to have, it can't really be the only thing that you use to analyze a property.  Is there a monthly rent limit to where dropping below the 1% rule is ok?  Also, is there a similar rent where anything below it is considered a bad investment regardless of how good of a deal you got on the property?