What is 1%+ Cashflow Rule

[Ryan McLean]

Hello everyone,

I have heard reference to the 1%+ rule on a few different occasions. Can someone explain what this rule is and how it works?

Thanks much,

Ryan

[Michael Seeker]

Hey @Ryan McLean - I believe this is referring to the ratio of the monthly rents to the purchase price.  If the monthly rent is 1,000 and the purchase price is 100,000 then you're at 1%.  Many people will refer to "the 2% rule" meaning if monthly rents are 1,000 then you should buy the property for $50K or less.

These ratios will vary significantly depending on the type of property you are looking to purchase/own/manage.  2% properties tend to be rougher/lower income areas and have higher expenses whereas 1% properties tend to be more desirable areas attracting higher income tenants.  These rules aren't applicable to every city or every area in a city.  They're just used as a quick way to determine if a property is worth looking at further or not.

As an example, I target 1% or above in the areas I like to invest in my target city.  If I see a property with rents of 2,000/mo listed for $250,000, then I generally don't waste any more of my time looking at the listing because no matter what shape it's in, I likely won't consider buying it.