50% rule and 1% rule?

Question

I keep hearing the 50% rule and the 1% rule i was wondering what they are and how would they apply to a house hack?

Corey Hawkinson · Answer

@Michael Ludwig Others have defined it perfectly but I’ll use an example based on your St Cloud location for the 1% rule. If I were to invest in St Cloud I would need the numbers to be above 1% due to added risks that I see in your market. (Others might disagree with me, and that’s ok) I do like the St Cloud market, I’m just saying that I would want to be at 1.5% on a property in order to buy.

As you get closer to the Twin Cities the numbers change depending on the area. An investor in North Minneapolis will need to be at 2% to make the property work based on the metrics in that sub-market. Higher risks based on the tenants. Personally, I avoid that sub-market entirely.

However, if I’m looking in Edina I could come out ahead if I’m less than 1%.

I say all this to illustrate in the Minnesota market that these rules can be good starting points but you’ll need experience to understand how to apply the rules.

Todd Solberg · Answer

I dont base investments on a guideline but may give a place to start looking. It would be interesting to see markets where heavy regulation exists (i.e. Minneapolis) v. Other markets in Minnesota.  Assets should be evaluated on ROI and unencumbered cash flow.

Alfred Johnson · Answer

Really appreciate the clarity on when and where to use these rules of thumb. I'm currently reading The Book on Rental Property Investing and honing my lead analysis skills.

James Hamling · Answer

@Michael Ludwig They are Jurassic tools of navigation much like using a sun-stone to figure out which way to go. They had there place and time, were handy as heck at the time, unfortunately the old books and "programs" seem to keep going like the living dead even when the content has become completely outdated.

Like @Corey Hawkinson pointed out a person can still utilize them, but with much updated adjustments and conditional variations. There was once also a 70% rule that I actually used like the gospel for some time, until it didn't apply anymore.

REI is a river, always moving, adjusting, twisting and turning. You gotta be constantly adapting and utilizing todays tools and techniques which are generally out in paperback about 6-12months after there no longer viable.

Key for todays market is knowing your strategy with ultra detailed methodical planning, supported by solid data for viability, master of analysis, and action ready on the drop of a dime. Competition is at all time highs, you gotta be smarter, faster or have more $ to burn. (If you need help with that last one I am happy to volunteer, lol)

Daniel Anshus · Answer

@Michael Ludwig I would 100% echo what @Corey Hawkinson said.

Andrew Syrios · Answer

The 50% rule is mostly for apartments and definitely not for something you're not getting rent from. The 1% rule is important to keep in mind (i.e. how much will this property rent for and will it cash flow whenever you do eventually move out). But it won't be specifically applicable while you're living there.

Nicholas L. · Answer

@Michael Ludwig

These are both screening rules of thumb for performing analysis.  They are nothing more than that.  They may be more or less accurate depending on the specific analysis / specific property.

For a house hack, you generally want to look at your expenses both while you're living there and when you move out.  There could be major variation - for example, once you move out, do you still pay utilities?  Will you have made improvements?  Etc.

John Warren · Answer

@Michael Ludwig the 1 percent rule states that the monthly rents should be equal to or greater than 1% of the purchase price. For instance, if your property is 400k then it should gross 4k ore more per month in rents. This is still a general rule of thumb so it won't always work. I know here in Chicago this is pretty tough to accomplish in some of the nicer areas. I still think the price to rent ratio is very useful when comparing 2-4 unit properties though.

The 50% rule has to do with expenses. It simply states that 50% of the annual income will be taken up by operating expenses. This is more of a commercial real estate rule of thumb and I think it is less applicable to small multifamily 2-4 unit properties for several reasons. One of the main reasons is that almost no one will actually have a property manager on a duplex. The other is that small multi unit buildings typically have a few less expenses since they are run more like mom and pop buildings (No LLC, no leasing fees, no property manager fees, etc).

50% rule and 1% rule?

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