1% Rule - w or w/o vacancy?

Question

Hello,

I've got a quick question when calculating the 1% (or 2% or whatever percent you like) rule.  Do you run the calculation against gross rent or net rent?  I'm wondering if people take their chosen vacancy factor into account with this rule?

Example:

$1100 gross rents with a 1% rule = $110,000.00 max offer.

$1012 net rents (after 8% vacancy factor deducted) with a 1% rule = $101,200.00 max offer.

Obviously you would want to get the lowest price possible, but I'm just curious when running this quick and dirty rule of thumb how people are doing it.  Thanks!

Judah Hoover · Answer

That is a rule of thumb not a rule. Big difference. Don't use that to make offers. Just use it to see if a property is even close enough to do more follow up. All offers should be made based on a much more complete vetting of the property.

Account Closed · Answer

most people use gross rent as a quick scanning tool to see if the property meets search criteria

Kevin Stein · Answer

Yes.  This is exactly what I was looking for and makes perfect sense.

Judah Hoover · Answer

Okay, for what you are doing I would say it should be a true gross rent number you are using. The 1% rule of thumb is to be for anything is taken out.... why take out vacancy if you aren't going to take out repairs.... why take out repairs if you aren't going to take out taxes... all the sudden you are doing a full cash flow work up.

Don't take out vacancy.

Jason Burr · Answer

I have always looked at gross rents...$50,000 that will rent for $1,000 or more (2%)

However, I only use this to initially get a feel for the deal.  I then run all repair and operating expense numbers and see if I can make it worthwhile.

Brent Coombs · Answer

Even when you have worked out your own 'rules' that should be applicable to your market, I would still recommend that you NEVER multiply out that percentage to arrive at your 100% Maximum Offer! eg. If you have decided that you should be able to get 1.5% gross rents on your purchase price, and you realise that a particular property asking $110k should rent out for $1,500/m - please don't then turn around and immediately think that your Maximum Offer should be $100k!  There are SO MANY more things to take into account; many of them meaning that you won't have a GOOD deal unless your Maximum Offer is significantly LESS than $100k - or instead, those other things might determine that it is still a great deal at the full asking price of $110k or beyond!  Cheers...

Sky Mikesell · Answer

agreed.   1% rule is a 1% guideline.   this works fine as quick glance but take the time to run the real numbers on the deal.

Michael Herr · Answer

The 1% rule is a rule of thumb and should be adjusted up or down based on a variety of factors and experience.

The difference between factoring in vacancy or not doesn't matter.

It's a coarse rule of thumb,  use as little inputs as possible: don't factor vacancy in (at this stage of deal evaluation)

Kevin Stein · Answer

Maybe I should have offered more background.  I'm not actually using this rule of thumb to purchase property.  I have a thorough spreadsheet that I created for this that accounts for repairs, vacancy, management, capex, etc.  What I am trying to put together is a "summary" section that identifies common rules of thumb so others can more easily analyze the deal.  Some people like the 50%, some 1%, some 2%, other go off cap rate, etc.  I want my analysis spreadsheet to spit out all numbers so it works for anyone trying to analyze the deal quickly.

I know there are a million sites and spreadsheets that already do this, but I have to create something myself to get a good understanding on how the numbers actually work :-)

Just curious if people ran this particular shortcut against gross or net rents.  Thanks!

1% Rule - w or w/o vacancy?

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