I heard about the 1-2% rule, but where are the deals that fit?

Question

The 1-2% rule is when you purchase a home for $200k and receive $2,000 rent on it. That is extremely hard to find, yet this video says anything that doesn't follow the 1% rule isn't even worth it, as it most likely won't produce monthly cashflow.

Erion Shehaj · Answer

Rohan

May I suggest a different course?

If you think of a real estate investment as a business, the tenant is your customer and the house/property is the shop.

Instead of focusing so much on the shop, focus on your customer. What type of Tenant do you want as your customer? Take it one step further: what do those Tenant look for in a property: location, amenities? Last question, are there properties in those locations that you could purchase at a reasonable price/rent ratio and the property could be stable and produce some reasonable level of cash flow? Buy that property.

Remember one thing: Cashflow is a nice dividend. But fortunes in real estate aren’t made from cash flow but rather from capital appreciation through forced and natural ways.

Hope this is helpful for you

Jennifer Ryan · Answer

Hi Rohan,

I live in DFW too. As you've noticed, the 1% rule doesn't work here. (I think due to property taxes versus state income tax and DFW's low inventory.)

I typically count on cash-flowing $200-$300 a month. It's tight when you only own one property but as you accumulate properties and rents gradually increase, it gets easier. (But, & I stress, You MUST HAVE Back-up Funds to carry you through!)

My nutshell history... My first deal was 10 years ago. I paid cash, rehabbed & rented it. I refinanced it about a year in, getting back most of my cash and cash-flowing roughly $200 a month. I bought another property. Sold it for a profit, then another. (I flip houses on the side until I build up enough to purchase another rental property.) Then I bought my 2nd rental…

That 1st house’s rent slowly increased so it’s now cash-flowing about $670 a month but, it also has $130,000 equity from appreciation! BTW, I need to cash-out refinance it again and use that money to buy another property.

By flipping, then re-investing in long-term holds, I now own 4 single family lease properties (w/ handsome equity) & a duplex on top of my personal residence.

Rob Lee · Answer

Your best chance for immediate ROI in the current market is a house hack. Of course, there are opportunities in class C/D properties. Those properties require more time and management. There is also a greater risk of vacancy due to the income levels of potential tenants. Sorry if this isn't what you are looking for. Hope you find it helpful.

Aaron K. · Answer

1% rule is garbage because it is way too broad, it doesn't take into account expenses that vary vastly by region, you can find 1% stuff in TX but it usually isn't going to be in a super nice area and because the property taxes are high it doesn't carry the same cash flow implications that it would in other markets.  1% is mostly a midwest thing, a small southern town thing, and small towns in general, which come with their own challenges.

Paul Shannon · Answer

1% rules aren't hard to find, but that doesn't mean they are good deals.  Just a back of the napkin way to determine if you should investigate further.

2% deals are out there too.  Usually to find them, you need to have relationships in the markets you're looking.  Then you have to accept 1 of 2 things......they will be in C-D class neighborhoods and/or they will need a significant rehab and favorable refinance (hitting your ARV) to make 2%.

Matthew Irish-Jones · Answer

@Rohan Gangar. We meet and exceed the 1% rule in Buffalo NY

I think it has more to do with what market you live in.  The 1% rule is also a cash flow investing analysis to.

It’s not a relevant tool in an appreciation market.

Rob Lee · Answer

@Rohan Gangar Check out the rental calculators available here on BP. They are a big help.

Rohan Gangar · Answer

How do you calculate the costs to see whether you cashflow or not? What is vacancy at? Zillow provides estimates for tax and HOI. Also the video stated the 50% rule as a rule of thumb meaning, 50% of rent goes to expenses excluding mortgage.

Jeff Lee · Answer

1%  rule deals exist here in the Houston area, but you don't usually see them on the MLS/Zillow etc. unless you are searching terms like "TLC" or "handyman special". These deals are more available through wholesalers (DOUBLE CHECK THEIR NUMBERS!!!) or other sources of leads, like direct mail, driving for dollars, etc. The 1% rule is a good rule of thumb for quickly evaluating a potential deal. If the numbers are close to the 1% rule the next step is to do more due diligence, run the full numbers (e.g. BRRRR calculator), and then make a conservative offer. Do this enough times and you'll get one on the line.

Harry Nima Zegarra · Answer

@Rohan Gangar I hear you, I am also a new investor here in DFW, from the year that I have been in this (couple of properties already):

- It is almost impossible to get the 1% rule from MLS here

- I needed to work with wholesalers, who are useful but their numbers can be off some (or many times)

- I understand appreciation and the fact that this is for the long run, and building equity and wealth... but for the cash flow, it is very difficult as TAXES DEVOUR your cash flow... having said that, Dallas and Texas and always up on many lists for investment properties 2 to job growth and stability and appreciation....

- I wonder if going and investing in OKC would be a better strategy, Oklahoma is also up in many lists for investment properties and taxes are way lower, although job growth may not be as robust as here. Also income taxes play a role too.Not sure if someone here invests in both Texas and Oklahoma and can elaborate a bit more on this.

Harry

I heard about the 1-2% rule, but where are the deals that fit?

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