BRRRR method: How to use the 1% rule?

Question

Im reading the BRRRR book right now and its talking about the 1% rule and how you can use it as a guideline to see which areas to invest and to save you time on going deeper into a deal.

Im not 100% sure how you would use it but What do you guys think of this strategy?

Lets say your looking for a physically distressed property, can you use a rent estimator tool to see how much rent goes for different neighborhoods and then compare that rent amount to each property’s 1% rule?

Then the neighborhood that has the highest rate of properties that meet the 1% rule that is equal to the amount rent goes for in that area Is the best area to go in and look for that distressed property.

Kevin Sobilo · Answer

@Elie Merisier, yes you can do that. However, keep in mind some of what @Luka Milicevic mentioned.

The 1% rule is a solid rule of thumb to determine is a property will probably cashflow positively (a LITTLE). So, its a screening tool with easy math. If rents are $1,000 you need a sale price of about $100k.

BUT that is as far as it goes because a deal isn't what's advertised its what YOU make of it. You might manage a property to higher cashflow by raising rents, reducing expenses, rehabbing the property to bring rents up, even refinancing to a lower interest rate. So, you could buy something at 0.75% and work it to be 1.5% over a few years as part of "working the deal".

The 1% rule is just easy math and a way to zero in on properties that you want to analyze more deeply and then start trying to make a deal, negotiating, planning, and executing a plan.

Luka Milicevic · Answer

@Elie Merisier

I'm not sure when this book was written, but there was a thread that was trending a week or so ago that was discussing "is the 1% rule dead" Most folks said yes in their markets.

There are many markets in the midwest where you can still get the 1% rule. In my market it's nearly impossible, and I believe that's the case for most markets across the country especially in larger cities.

The 1% rule is just a basic guildline to very quickly and roughly analyzing a deal. It's not the be all end all. There are so many other factors you have to evaluate.

The worst deal I ever did in my career had the highest rent to value ratio I have ever purchased.

I have bought deals that at the time were at about the 0.6 rule. Today they are renting for 1.5% rent to value from where I bought them.

The best rental I have ever purchased was at 0.73 rent to value.

So just keep that in mind as you are analyzing deals.

Account Closed · Answer

Depends on the area entirely. In an A class neighborhood, it's unrealistic to expect 1% rule, and often difficult to even positively cash flow from day one. Re: your proposed strategy- the highest rate of properties meeting the 1% rule will be in worse neighborhoods, so your proposed strategy is to buy the worst home in a bad area, which is high-risk high-reward. Can easily achieve 1% rule but there's inherent risk in those areas.

John Morgan · Answer

@Elie Merisier

This book was written when you could find the “1% rule” good cash flowing properties in your sleep. Since then, everyone and their brother have become real estate investors and we’re all fighting for the same good deal. It’s extremely competitive now. You’re going up against cash buyers who know what they’re doing. They’ll grab all the good deal and have the best contractors and labor to BRRRR with. Just be realistic with your $ before going up against the big dogs.

With that being said, I’ve been picking up a couple properties a year and slowly scaling up. I seem to get the leftover scraps that nobody else wants since the cash flow is much weaker after a BRRRR or just turnkey properties I find off the MLS. lol. But over time, I’ve been able to raise rent and build equity which I’ve used to buy more and more properties after a few years. Good luck!

John Chong · Answer

The 1% rule is a quick and easy way to see if the property will cash flow. There's other factors like taxes, insurance, and etc but if your loan amount is $200K you'll want that property to cash flow a little more than $2K a month. If its under 1%, you'll have to bring more cash to refinance out of the BRRRR since you'll be under 1.0x DSCR. Your rent's wont cover your expenses and you'll be negatively cash flowing.

Deandre P. · Answer

I wouldn’t place much emphasis with the 1% rule. At best I may use it to get an idea on which markets have the potential to cash flow better. There are so many caveats that aren’t captured in a 1% rule analysis (appreciation, taxes, insurance, debt coverage, etc). I’ll typically analyze a few deals out of each market and compare markets that way whenever I’m deciding on which market to go into.

Peter Dorinsky · Answer

In light of that discussion thread that was mentioned, "is the 1% rule dead" here's an article written by one of BP's very own that has some helpful insight: https://www.biggerpockets.com/...

I personally still use the 1% rule amongst other metrics, but I agree that its relevance depends on the areas you're looking in and your strategy.

BRRRR method: How to use the 1% rule?

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