Property doesn’t meet 1% rule but cash flows. What am I missing?

[Logan L.]

Hi BP community!

I am a relatively new investor in Fayetteville, NC. My first rental property is a 4 bed, 3 bath single family. Purchase price was $150k and current rent is $1,475. My analysis of the property is as follows:

- Income: $1,475

- mortgage (taxes and insurance incl.) $920

- no HOA fees

- no landlord-paid utilities

- I self-manage so no property management fee

- pest control service $30

- CapEx: 10% or $147.50

- Vacancy: 5% or $73.75

$1,475 - $1,171.75 = $303.25 positive cash flow.

In regard to 1% rule, my property is currently sitting at 0.98% yet I’m seemingly still cash flowing $300. Can someone tell me if I’m missing something? Thanks!!

[Joe Splitrock]

What you are missing is that the 1% rule has nothing to do with cash flow. It is a rough rule of thumb to estimate where rents should be relative to purchase price. You need other numbers to calculate cash flow, like mortgage payment and expenses. 

If you pay cash for a property, ANY property will cash flow. If you 100% finance a property, it may barely cash flow, but may still be a good deal. That is because with $0 into a deal, even $1 of cash flow is infinite return. Cash on cash return is a better metric than cash flow in my opinion. 

I know I am late to the party and it seems you have good answers. Your numbers look fine to me. Houses like this are our bread and butter business. Just place good tenants and you will do wonderful.