1% Rental Income Test

[Josh Stanley]

Do you base this 1% test on ARV or total amount invested (Purchase Price + Rehab Costs)? I find that I can rarely make the numbers work in my area based on ARV but If i use total amount invested (Purchase Price + Rehab Costs) I can usually be 1% or more.

[Joe Hines]

You would calculate the 1% rule using the purchase price + rehab costs + any other costs required to get the unit ready for rental and divide the gross rent by this sum. I want to emphasize the 1% rule is just a quick and dirty way to evaluate the economic feasibility of a perspective deal. It doesn't replace a full analysis of all costs and it isn't an ROI.

To look at the true ROI, you'd need to consider your real out-of-pocket costs since that's what you've invested. So, for example, if you purchase a unit for $100K, put down $20K and finance the remaining $80K, you've only paid $20K. You'd then add up taxes, insurance, estimated OpEx and CapEx set-aside, PM fees, etc to look at your regular costs, subtract that from your estimated rent and divide this number by the $20K. That would give you your real ROI.

One final note: the BP has a Rental Calculator that steps you through this process. It's pretty good and lets you factor in annual appreciation and rent increases to calculate a longer term ROI.

Hope this helps!