Thoughts on the 1% Rule

[Paul Britton]

https://www.biggerpockets.com/...

I just read this article from Dave Meyer saying he doesn't follow the the 1% rule when acquiring properties. I would like to talk to get some experienced investors thoughts. 

Paul 

[Jeremy H.]

When you are talking about general LTR residential properties say, SFHs or multi family (2-4) I think it's a good general rule to work and screen from. 

My first few deals I screened using the 1% rule and they are working out good - some initial deferred maintenance/Cap Ex to get the properties right. They are properties in affordable areas that cashflow well. 

Then you have some unique properties - maybe they come with an extra lot, ADU, unfinished room etc - there is something unique about the property that makes it more valuable. So initially it may not cashflow well - but if you change a 2/2 into a 3/2 or finish that basement/attic you'll find that the unit cashflows well. So it may not initially fit the 1% rule but with some well thought out changes it can still cashflow well.

Then you have markets that may be growing but the properties are just expensive relatively - they don't fit the 1% rule but you can anticipate appreciation based on population growth, job growth - something driving people to move there. So maybe you don't get the cash flow but you get appreciation. This can be borderline speculation - works ok for big companies that can take the risk and the loss (worst case scenario). It seems like most mom and pop landlords invest locally and end up getting appreciation based on luck and location. They're simply investing close to home and the place ends up appreciating down the road. 

It comes down to your strategy - personally I need the cashflow as a security net. Does this mean I'm buying every 50k house that I can rent for $650/mo - no because it's junk. I'm buying good properties in neighborhoods (even if they cashflow a little less) because these will be desirable easy to sell properties in the future. Say a 130k place that rents for 1100/1200/mo

So you don't "need" to follow the 1% rule - but I find it works pretty well as a general metric for screening  cash flowing properties.