Rule of 100, 1% Rule, or whatever it is called

[Mike Smith]

In looking at rental properties with a realtor, he mentioned the rule of thumb of looking for something with gross rents of at least 1% of the purchase price. What are your thoughts on this? Do you use this rule? If so, how do you use it?

This seems like an overly simple analysis. Don't you need the expenses, etc. to figure out if the deal is good. I can easily see situations where the rent meets the 1% criteria, but expenses cause negative cash flow or the cost of borrowing ruins the profitabiliy. Maybe the rule is used as screening criteria to help determine if you want to do any further investigation?

[Ryan Webber]

"Magic Rental Formulas" are common with investors for sifting through the hay stack to find the needle, but an experienced investor is still going to crunch an actual income expense statement on the property before they put it under contract.

Now the 1% rule of thumb completely depends on your market. In my market my number is 2% or a monthly gross rent multiplier (GRM) of 50. A monthly gross rent multiplier allows easy computation of general price from rents. Rents minus utilities multiplied by 50 should be my highest purchase price. A 1% or 100 monthly gross rent multiplier are a dime a dozen in my market. When you crunch an income/expense statement, including maintenance and vacancy, you most likely won't even be cash flowing (depending on insurance and taxes) on a 100 monthly GRM. If I remember correctly I think a 90 monthly gross rent multiplier (7.5 annual GRM) is the highest you can realistically go to cash flow.

Realtors are NOT investors. Be careful when you are trusting a non-investor with investment advice. Determine your magic numbers on your own and then take them to a realtor. Unless you are in a HIGH appreciating area then a non-cash flowing property is not a good investment startegy.