What is the 1% Rule Anyways...

[Matthew Hull]

...but a load of crock. 

Ok - here's my question: what did the 1% rule ever assume?

I understand it is a pre-filter rule of thumb. Heck, I used to defend it. But I'm looking over numbers and I'm starting to think it may have always been a bit of a unicorn that appeared once when the stars aligned, but otherwise doesn't really make sense under MOST conditions.

I've nerded out a little and ran numbers comparing interest rates, P+I payments, and initial principal balances and I've found with MY assumptions, that the 1% rule is actually NEVER a valid filter. 

My assumptions are:

1) Cap-ex, maintenance, vacancy, and PM costs are around 33% of rent. 

2) My desired cash-on-cash return is 12%.

3) My taxes and insurance, for argument's sake, are a combined $550. 

Under these assumptions, 1% never works under any interest rate conditions. Which I GET means that someone's numbers will work if they have different values for their assumptions. 

So I have to wonder - what assumptions create the right mix of numbers for the 1% rule to work? Pick your interest rate. Heck - I'll come back as I continue analyzing this and provide you with my findings.