Help with the 1% Rule

[Summer Noyes]

I'm a newbie to rental real estate investing and I'm doing my research and education. I've read and listened to some books and podcasts, but I'm sorry I'm a little confused about the 1% rule. As I understand it, if the rent comes out to 1% or more of the purchase price, that is a short cut to assume it will be a profitable rental. I realize it's only a short cut and that all expenses should be calculated. I just want to be sure its the purchase price and not the loan amount that I'm to use in the equation. Meaning if the property is $100k and I put down $20k, the 1% is based off the $100k and not the $80k. When does this rule not apply? I am considering property in CA where if I bought a $500k, 3bd/2ba home, there is no way I'm getting $5,000/month. I might make a slight + cash flow, but I'm looking down the line to 5-10 years from now when this property appreciates, because of community improvements, and I sell it. Any input is greatly appreciated. Thank you.

[Bjorn Ahlblad]

@Summer Noyes Let me answer you with personal experience specific to Silicon Valley. You won't be getting anywhere near the 1% rule, maybe the .25% rule, and your planning horizon is way too short. At 5-10 years you may be headed right for a trough. I owned properties in San Mateo and Los Gatos they made money because I had held them for 30+years and they were paid for. Some investors that I knew in California ended up under water with their properties and ESP's (employee stock plan) at the same time, and they lost their shirts. Be very conservative and be way under leveraged in those markets or you won't do well. Being forced to sell in a down market is a disaster. The 1% rule applies to the purchase price. In order to see any cash flow you need to be more like 1.35% with regular financing. All the best!