One Percent Rule
When you are seeking to invest in real estate, there are all these rules to apply to your analysis before buying. There’s the one percent rule, the two percent rule, and the 50 percent rule. One frustrated investor wrote recently on Bigger Pockets, “I understand that finding the “perfect” buy & hold property is rare.” I understand the concept of analysis paralysis vs market peak buying. I struggle to find anything that comes close to the one percent rule here in Utah, Wasatch, and Salt Lake counties.
What is the One Percent Rule?
Investopedia says, “A rule of thumb used to determine if the monthly rent earned from a piece of investment property will exceed that property’s monthly mortgage payment. The aim of the one percent rule is to have the rent be greater or equal to the mortgage payment, so the investor breaks even on the property at worst. The rule is used for quick estimation, as there are other costs associated with a piece of property that are not taken into account, such as upkeep, insurance and taxes.
How does the One Percent Rule work?
Purchasing a piece of property for investment requires a thorough analysis of future rents compared to the cost of owning that property. Property owners want to maintain a cash flow greater than costs. For example, an investor is looking to purchase a home valued at $200,000, with the goal of renting the home out for income. After placing 20% down, the investor has a mortgage of $160,000. The one percent rule says that the home would have to be rented out for no less than $1,600 per month ($160,000 * .01).
Many investors, as a whole, are realizing they can’t get a property for as cheap and with as nice of returns as they could even just a year ago. It’s great news for the real estate market, all of our current investments, and the economy as a whole, but it is forcing investors to settle for lower returns.
It is tough to buy a house for a rental using the one percent rule unless you buy for cash. Take a house at $450,000. You put down 20% leaving you with a mortgage of $360,000. It is tough to rent the house for $3600 per month when the market is really about $2,000 per month. It might be better to purchase the property for cash and rent it for $2,000 per month for a yield of 5%.
Point is, use the 1% or 2% rule or whichever one you want only as a guideline to get you looking at a property. Once you are into the numbers of a property and evaluating it for serious purchase, the 1 or 2% rule should never be brought up. In no way should it be a justification for buying a property. Simply use it to get your list started of properties worth considering.
The one percent rule or 2% rule is stupid. If you’re in South Florida, someone has officially found you a junker in a questionable neighborhood that not only needs work but is going to attract a raunchy tenant who will never give you the full amount of rent anyway. What is stupid is if you buy a property because it meets the 2% rule.
Maybe, it is time to be a seller in this economy. If you think prices have gotten whacky and want out now, call us.
Diamond Life Real Estate, Inc. is here to help property owners. We are investors who focus much of our business on helping homeowners out of just about any situation, regardless of how challenging. We buy ALL types of distressed real estate, whether bank owned, vacant, abandoned, foreclosed, or a property in need of major rehabilitation. We don’t EVER charge any fees or commissions, but simply offer the honest truth about what we can do to buy your home or property, usually within 2 weeks or less, to resolve your situation. After our initial discussion there is no obligation on your part whatsoever.
Give us a call today at 904-834-1326, we might be able to help.