Do I need to make sure that a deal is under 1% & 50% rules?

Question

Hi folks, I am trying to buy a quadplex to house hack for my family. We are planning to occupy there for 1 ~ 2 years and looking for cash flow after we leave. So my plan is to get experience on managing property & maintaining tenants. And right now, I am looking at a deal that looks promising but number isn't that great but also not that bad. But it seems the deals is a little out of 1% & 50% rule. Here is the exact number.

Property ask price: $486k but rent income is $4800($1200/unit). My mortgage will be $2600+(7.3% rate) so expenses can be $2200 at max as 45%. These numbers are not a house hacking scenario but to check if the deal is good so that I can start house hacking. In short, the deal has < 1% rule for rent to asking price and 50% can't be spent as expenses. I also feel this looks not great because of 7.3% interest rate but also I made it so conservative since I didn't take vacancy rate into account.

- I am aware that possibly I need to negotiate the asking to 480k to match 1% rule but also not sure if that's convincing enough.

Theresa Harris · Answer

Don't worry about 'rules' as they are guidelines some people use to get a quick idea if the property works. You need to look at the expenses (mortgage, insurance, property taxes, etc) and income. If you are living in one of the four units, run the numbers as if you were renting all 4 units. Ideally the rent from the other three units will cover most of your living expenses (ie 'rent') for your own unit while you are living there. If you are planning on buying it with a smaller down payment, that will also increase your mortgage costs as you are borrowing more and also need mortgage insurance.

The price of the home (from the seller's perspective) is based on market value and condition, not on whether or not it matches the 1% rule. Talk to your realtor about what a realistic price is for the home.

The price of the home (from the seller's perspective) is based on market value and condition, not on whether or not it matches the 1% rule.   Talk to your realtor about what a realistic price is for the home.

Sarita Scherpereel · Answer

Dave Meyer- from bigger pockets wrote and interesting blog a few years ago about the 1% rule being deal. https://www.biggerpockets.com/blog/1-percent-rule-dead

It's pretty fascinating. Such a reminder that these rules are not the standard for investing. As @theresaharris mentioned these are just guidelines. I'm from Sugar Land but now live in Chicago. I'd say if you find inventory to buy in Houston that is close to these guidelines, I'd go for it. Houston isn't making 4 unit buildings regularly. It should appreciate...depending on your area. Definitely ask your realtor about appreciation in the area you're looking to purchase.

Best of luck!

Jay Thomas · Answer

The 1% and 50% rules are guidelines, not absolutes, especially with high interest rates. Prioritize cash flow after expenses, vacancies, and management costs.Your numbers show potential positive cash flow, but the 7.3% interest rate affects returns.

Wale Lawal · Answer

@Jaekwan Lee

The rent-to-price ratio and expense ratio are critical factors in property evaluation. The monthly rent is less than 1%, while expenses account for 50% of the rent. A negative cash flow indicates a possible down payment. Negotiating the price and considering expenses, such as vacancy and maintenance, are critical to identifying if the quadplex is a viable investment.

Good luck!

Michael Smythe · Answer

If you are living there, you should be able to figure out how to manage it yourself.

Also, why are you looking to live for free?

Appears each unit will rent for $1200, so find some middle ground on the cashflow -$400 up to -$1200 to make a realistic offer.

Jaekwan Lee · Answer

I think that's my problem. I am not sure what price is good to go as a first time buyer and house hacker. The most tricky part is realistic other expenses. If I make the other exponses too conservative, no deals are good enough to purchase whereas not being conservative makes me scare as I don't know what the realities are.

How do I get the expense most realistic? The below was something I was using but not sure if this is conversative or not.

- Maintenance & Repair: 5% of total rent- Cap ex / utilities: 5% of total rent- Property management: 8~10% of total rent- Misc & reserve: 5% of total rent

Full rent: 4800(rent) - 2600(PI) - 800(TI) - 1150(Expense) = $250/mOwner occupied: 3600(rent) - 2600(PI) - 800(TI) - 1150(Expense) = -$950/mOwner occupied & no PM: 3600(rent) - 2600(PI) - 800(TI) - 700(Expense) = -$400/m

I thought it would be $0/m if owner occupied although $400/m for myfamily is low enough.

To cover entire expense, the only thing that can be reduced is PI and should be $2200(PI) and if I do reverse calculate, the house price should be $410k. This seems unrealistic.

Michael Smythe · Answer

@Jaekwan Lee what price do you have to offer so rent covers your mortgage, property taxes, insurance and other expenses?

Adam Bartomeo · Answer

The 1% rule actually used to be the 2%. Over time the 2% rule became unachievable and it was changed to the 1%. Currently, in my area you are lucky to find anything that meets the 1% rule. There are many metrics that should be taken into account when purchasing. Use them as guides in decision making not hard and fat rules.

Anthony Swain · Answer

@Jaekwan Lee

Hey! Welcome to the forums!

Fellow house hacker here. It sounds like you have a good situation being able to house hack with your significant other in a quadplex. You'll get to split your unit's rent with another person too ;)

I think you're in a better position than other investors. YOU can live in the investment property. You will benefit from low-down payment options (3.5-5%), possibly reduced living expenses, appreciation, and loan pay-down. Not to mention, you'll gain valuable experience in property management, renovations, project management, etc.

Also, would you consider doing a furnished rental for one or more of the units? This strategy can increase your income while you are house-hacking. This strategy has worked tremendously for us, but I'm not sure of demand or rates relative to your area.

Keep running your numbers, but don't get stuck in analysis paralysis. Eventually, you will need to leap into your 1st investment. If your numbers check out and the deal makes sense, then trust your process.

Good luck! I'm happy to help if you have any questions.

Sarita Scherpereel · Answer

Yes. It's harder to find. Especially in a house hack. I love this article because it really highlights how the rule came about. Most of these books on investing are already out dated by the time they publish. Buyers are reading concepts on investing that we haven't seen in years or decades like in Rich Dad Poor Dad.

I constantly preach about attending meetups, staying active on blogs and following local investors on instagram. It's a great way to keep up with the market on a real time basis.

Do I need to make sure that a deal is under 1% & 50% rules?

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