1% deal crushed by 6% interest rates?

Question

So I bought a run down property for about 120K put 60K in, it's worth 225K. I have a renter for 1700.

I'm not great with the BRRRR tool on the site here, but if I'm doing it right, 5% refi means I'm fine and 6% means I'll lose money if I set aside my targeted $300 a month for capex vacancies etc.

I thought I would be fine with a near 1% rule deal. What am I missing? Please help, I have to decide today whether I'm selling or if renting still makes sense.

Jonathan R McLaughlin · Answer

@Paul Newman the idea that you can get all your money out and still cash flow as the standard of a good deal is false. Great when you can do it, but using money to make money is more normal.

If your deal is “crushed” at 6 vs. 5 % you were skating on reasonably thin ice to start

Eric James · Answer

Artificially low interest rates have gotten a lot of people interested in investment real estate. Everybody and their brother has been wanting to invest in real estate.  Witness the growth of BP. The rise of interest rates is going to drive a lot of wanna be real estate investors away.

Andrew Postell · Answer

@Paul Newman what's your actual loan amount here?  Admittedly, whatever the loan amount is it's likely you won't be cash flowing this year.  Don't lose sight about what real estate is - this is a long term strategy.  Real estate is not a "Get-Rich-Quick" scheme.  Long term baby.  So year 2, you will be increasing your rent.  Same on year 3, 4, 5, etc.  You should be looking very well on this property in the future.  Also, there might be some debate to this next part but if you factor in a 5% appreciation amount on that home that's $11,000....so even with $500 of cash flow a month your property should still be growing in value that will outpace cashflow anyway.  I hope all of this makes sense.

Robin Simon · Answer

Remember - you don't HAVE to take ALL your equity out on a BRRRR deal.  You can always keep some more equity in the property and refinance into a lower leverage loan (something like 70% LTV or so).  You'd get a lower rate and likely cash flow and it would still be a successful deal.

Jay Hinrichs · Answer

I was just on the phone with one of my clients that does a lot of BRRR and DSCR loans rates are right at 8% these days for him and he owns about 80 doors so experienced fella..

the BRRR cash out refi is where the rates are going to get whollopped.. those buying with 20 to 30% down or more are going to find rates in the high 5s or low 6s.. so its back to the future where you had to have actual cash into a deal to get premium financing or rate .

Bill B. · Answer

The payment on $180k is under $1,100 at 6%, even with zero down.  You should be fine charging $1800 rent (1%). Especially if you put the standard 20% down and only borrow $144k for under $900/mo payment. 1% rule doesn’t include zero percent down but it looks like you’d still be fine as long as that $700 between $1800 and $1100 covers taxes/insurance and cash flow.

Rodney Sums · Answer

I've always considered the 1% rule more of a a way to screen properties rather than making a buying decision from that number. When searching properties if it is way below 1% it's highly unlikely to cash flow. If close or above, it's worth  putting the numbers in to the spreadsheet.

The most important numbers come from entering the purchase price, cash in, rent, mortgage  rate, expenses etc and seeing the final number.

Share your numbers as others have mentioned

Andrew C. · Answer

woot

Andrew C. · Answer

I don't think the "1% rule" is a rule in the sense that 'if you charge 1% of the cost in monthly rent then you will be cash flow positive". It's a general guideline to help you decide what to ignore when looking for cash flowing properties. If it's (much) below 1% it probably won't cashflow. Use it as a filter, and then work out the actual costs on the ones that pass and see what you get and make decisions from there.

for example....

"I use 0.5% for property taxes. And that’s probably a little too high."

REALLY REALLY depends on where you are. in many places (Wisconsin for ex) it's more like 2%. Some it's much less.

Are you paying for any utilities? Do you have a prop mgt co? Are you in a flood plane and hence insurance is high? Near the beach or a swamp which makes stuff rot quickly so high maintenance?run your actual #s and decide what to do. you can get estimated property taxes online (don't use what the previous owner was paying), get an insurance quote for the specific property, etc.