1% Rule. How important? Any wiggle room?

Question

I am about as green as they come, but I’m curious to know how important is the 1% rule?  In my market, rent generally doesn’t exceed $1300, so does that mean any house is priced more than $130,000 aren’t viable?

Mike McCarthy · Answer

@Justin Lieber I truly believe this is location specific. Taxes vary widely, as does a host of other things. You need to run the numbers for your area/neighborhood and figure out what makes sense for you.

I know I can make money in my area at 0.8%. I’d imagine, someone investing in NYC is looking more at 1.5%. NJ or CA with high taxes and additional tenant-friendly laws might even be more (or less, I don’t know!)

The 1% rule is really a guideline - but you need to figure out what makes sense for you.  But it’s a real quick way to figure out - if a property is at 0.5%, I’m probably just going to skip it. If it looks like 1.8%, I’m certainly going to dig more into it!

Dennis Wayne · Answer

It’s relative ..but if you can’t hit 1% then it’s a marginal deal not worth getting excited about . In my area it’s not uncommon to get a 4-5% deal . In other words I’ll buy a house for 10 -12 grand and get 700$ a month right away . Now the down side to that is our area never appreciates , that same 10k house will still be worth around 10k after a decade

Matthew Irish-Jones · Answer

@Justin Lieber it’s not very important.  Every market is different and every deal should go through a full analysis.

These rules are set up to quickly look through properties and decide which ones are worth further analyzing.  I rarely use the 1% rule.

Joe Villeneuve · Answer

Using percentages, the percent of importance applied to the 1% rule is 0%...as in there is no importance to it.  It doesn't tell you anything of value, and it risks leading you away from good deals and/or into bad ones because, again, it tells you NOTHING of value.

Collin Bryston Adams · Answer

the 1% should not make or break a deal. Area's vary so much on rent to home price ratios that I do not believe the 1% rule is much relevant in todays markets. My area is .07-.08% of home prices but still am able to cashflow $200.

Conn G. · Answer

Hi @Justin Lieber,

Welcome to BP. Just like any rule of thumbs, there are some limitations and exceptions to it. For example, a property with high property taxes, HOA fees, owner paid utilities, or high maintenance costs can all destroy your cash flow. These are all things to be considered when evaluating a property based on a cash flow standpoint. However, the 1% rule is a good starting point to look at when getting started on evaluating a property. Treat it as the first step but not the final one. Due diligence is the most important step when finding an investment property.