1% Rule in Practice Regionally

[Patrick Menefee]

Hello BP

I’m curious how members in different regions have tailored the 1% rule (especially charlotte, but anywhere really). Looking relative to some of the properties I’ve seen in the area, 1% seems difficult to attain and 2% seems nearly unfathomable.

I know this isn’t a hard and fast rule, and i know it varies by market. But how many of you abide by it or what variation works in your area?

Thanks!

[Joshua Davis]

@Patrick Menefee, I'm in Charlotte as well sir and I can definitely see where your frustration is coming from as to trying to find a solid property that meets the 1% rule. But I will say, although its difficult its certainly obtainable my friend, just takes some time, focus, determination, and the ability to analyze deals and be creative. Also, working with a good agent can be a huge help as well. My wife and I close on a rental property this week in Greensboro, NC (although we're based in Charlotte), but I can say on our search we did come across properties within Charlotte that met the 1% rule but they were just out of our budget at the moment. But keep searching sir and you're bound to come across something... and being ready to grab it when you find it is a big key as well because everything in Charlotte that even appears to be a good investment gets snatched in a matter of hours these days. Hope this helps

[Frank Wong]

Hi Patrick,

The 1% rule is very hard to achieve in the coastal states but can work in other parts of the country.  I invest in TX and I am able to get them for every house I buy, but all of them require 20-30k of rehab to hit the number.  Very hard unless you have a lower entry price and can create equity.

I don't think this rule is really that important.  For example, a 2/1 house Berkeley CA rents for $3500 a month the market value of the house is about $975k.  If the house for some reason was available to purchase for $800k investors would be all over it even as a rental. 

I think what's more important is the current value and ARV. Do this correctly and everything works out just fine.

[Michael Clay]

@Patrick Menefee 

Hi Patrick,

I live locally in Charlotte and have 2 SFHs that I've purchased in the last 2 years and both of them hit the 1% rule. I purchased one off-market and one on the MLS. What I've found personally is that it's far easier to achieve the 1% rule in C type areas, which is usually the case in any market. Also, being able to buy a house that needs some work before renting it out helps a great deal. Good luck!

[Matt Leber]

@Patrick Menefee I use the 1% rule to evaluate properties in Central Florida and Jacksonville. Our two single family properties in Brevard County meet the 1% rule and provide solid cash flow. Our two duplexes in Jacksonville were 1.6% when we purchased them and now almost 1.8% after our rent increases. Our primary home will meet 1% if we move out and rent it. I find it’s usually a good rule of thumb to narrow the deal funnel in my state. There are exceptions of course, but it generally helps to limit the number of deals I am analyzing so the options aren’t overwhelming.

[James Rodgers]

In Charlotte the 1% rule is hard, but not impossible. It's certainly more difficult to find if you're looking on the MLS or the portals (Zillow, trulia, etc). The deals that fit the 1%, and especially 2%, rule are going to need to be made, most of the time, in the Charlotte area. Using a real estate agent who can help you find distressed sales or off market properties is really where you're going to find that. Driving for dollars is also a great way. Was driving between meetings the other day and I noticed a distressed property and I immediately jotted down the number. Imagine if I decided to commit an entire morning in a specific neighborhood!

So, the short answer is yes, in Charlotte, and honestly every market, you can find properties that fit the 1% and even 2% rule. It’s just going to take a lot more legwork because it’s not 2010 when every home on the block was being sold for 45% of its appraised value. 

Good luck!

[Laura Shinkle]

Hi @Patrick Menefee!

1% rule is definitely challenging to find in this market and depends on a lot of variables (price range, condition, condo vs single family, neighborhood, town, etc).

Going slightly outside of Charlotte (Concord, Gatonia, etc) like @Joshua Davis did. That could be an option for you. However, I've found patience is usually rewarded. Don't get frustrated! Analyze the properties and get advice from people you trust!

[John Thedford]

I don't live or die by the 1% "rule" but use it as a quick screening to see if a property might make sense. If I can't get near that it is a no go for me. 

[Beau Fannon]

Got to big in Austin to hit the 1% rule here. Last 1% deal I heard of involved a group of fourplexes. 

[Jordan Moorhead]

1% is possible in Minneapolis and Saint Paul but I haven't seen the 2% rule work in a long time

[Michael Ealy]

In the midwest, it's easy to find and buy SFHs and small multi's that can be purchased at the 1% rule . Sometimes though the numbers still work specially if you can get in using seller financing.

2% - now that's a challenge although you can still get them from time to time, specially if it needs a lot of repairs and the seller is really, really desperate.

[Kenneth Garrett]

@Patrick Menefee

The 1% rule is just a rule of thumb.  If I look at my rental properties they are all at 1% or better.  Buying at the right number is important.  I think having positive cash flow and taking advantage of mortgage pay down is more important while taking the tax advantages of mortgage interest, property taxes and depreciation.  If you take into account all of the advantages you will realize 1% is just not that important.  

Good Luck.

[John Woodrich]

Originally posted by @Jordan Moorhead:

1% is possible in Minneapolis and Saint Paul but I haven't seen the 2% rule work in a long time

I have clients who are hitting the 2% rule in MN however they are 1.5 hours or more out of the cities.  They can cash flow but they are older buildings/houses and don't seem to appreciate at all...

[Russell Brazil]

DC suburbs generally yield 0.67%. DC proper yields 0.5%.

[Dennis M.]

I guess I’m the oddball I would pass a deal if it was anything less than 2% . I invest in lower income areas in western pa. All of my stuff is atleast 3%

[Cong Zhao]

@Patrick Menefee

Hey Patrick, I'm facing the same problem, if you farm off market deals, you will find some in Charlotte can achieve 75-80% LTV, within 485 loop. but if you BRRR, most of the time it would break even every month.

if you stick to 1% rule, C class single family or townhouses will be more likely. But hey, you can do different strategies in different market. Based on what you want to achieve.

Want more cash flow on rentals? Surrounding areas will have better numbers. Want to invest in appreciation? The break even BRRR I mentioned in Charlotte might be a good choice, considering cash that you actually need is only 5-7% of ARV after BRRR. Or just flip it if you can get 70% LTV.

Best luck!

[Jordan Moorhead]

@John Woodrich I have a 12 unit in Madison that hits that

[John Woodrich]

Originally posted by @Dennis M.:

I guess I’m the oddball I would pass a deal if it was anything less than 2% . I invest in lower income areas in western pa. All of my stuff is atleast 3%

Soooo...... Do you feel the need to renew your carry permit before you show up at your property in these areas???  Or are you buying these with property managers in place???

I don't know about the lower income areas in PA but with what you say I imagine they are priced at the war zones prices in most metropolitan areas....

[John Woodrich]

Originally posted by @Dennis M.:

I guess I’m the oddball I would pass a deal if it was anything less than 2% . I invest in lower income areas in western pa. All of my stuff is atleast 3%

Your comment here makes your comment above seem a little skeptical.....   https://www.biggerpockets.com/forums/52/topics/681... 

So you recommend people find at-least a 1% deal but you will only invest at a minimum of a 2% deal????  In PA???

[Patrick Menefee]

Hey all, thank you for the extremely insightful responses. It's especially great to hear what people are doing or seeing in the Charlotte market in particular, as I'm relatively new to the area and have only utilized MLS and other third parties thus far.

I know that i definitely need to practice my ability to analyze deals (something I’m working on now) and in addition i have a lot of work to do in learning how to plan and estimate rehabs. A big part of my deal analysis also comes down to learning neighborhoods, and being able to properly differentiate between B-, C, and below neighborhoods.

This input is very helpful...knowing that the deals are there and I just need to find them is exactly what I needed. Sounds like it’s time to go practice analyzing some deals...

[Caleb Heimsoth]

@Patrick Menefee. I just bought a 3 percent property deal about 2-3 hours from you in Charlotte (c class area) so it can definitely just vary. Really depends what you want as far as tenants and asset class.

[Patrick Menefee]

@Caleb Heimsoth ya that’s a good consideration. I met an investor in Charlotte who talked about Belmont, Mount Holly, and Gastonia which I can look at.

Part of it is my need to think more about strategy...before actively reading and listening to BP books and podcasts, I was planning to start with one house per year and use VA and FHA loans to maximize the use of capital and snowball that way. As a result, I only really looked at investing in areas within the area I'd want to live.

Now that I've learned more about creative financing and strategies like BRRRR, looking at a house in one of those areas doesn't seem as far fetched as an interim option...

[Caleb Heimsoth]

Originally posted by @Patrick Menefee:

@Caleb Heimsoth ya that’s a good consideration. I met an investor in Charlotte who talked about Belmont, Mount Holly, and Gastonia which I can look at.

Part of it is my need to think more about strategy...before actively reading and listening to BP books and podcasts, I was planning to start with one house per year and use VA and FHA loans to maximize the use of capital and snowball that way. As a result, I only really looked at investing in areas within the area I'd want to live.

Now that I've learned more about creative financing and strategies like BRRRR, looking at a house in one of those areas doesn't seem as far fetched as an interim option...

All my rentals are usually in places I wouldn’t want to live.  They cash flow like crazy though.  I also expect little to no appreciation, besides forcing appreciation so again just give and take.

[Patrick Menefee]

@Caleb Heimsoth that sounds like the smart approach, and similar to what I’ve been thinking lately. Might look for more opportunity for appreciation in the houses i move into, but cash flow and loan pay down are probably the smartest choice for the rest.

[Michael T.]

@Patrick Menefee yes every property is regional and typically properties that are in B-, C, C+ areas will get closer to the 2% rule.  While these properties will get closer to 2% they will have very little appreciation and typically have more repair costs.

Determine what you want to achieve and what your goals are and you'll find out if you're okay with appreciation or cash flow.

I personally invest in the Los Angeles area for appreciation and out of state for cash flow.

[Thomas S.]

I would not consider investing in any property that did not achieve the 1%. I am not a speculator so cash flow is all that matters to me. I won't work for less that the 1%. My money can do better elsewhere.