The 1 Percent Rule
The 1 Percent Rule
Recently when reading on Bigger Pockets, I came across a real estate investor writing about how to find the “perfect” buy and hold property and how hard it is to find. And Wow, could I relate. I understand the concept of analysis paralysis vs market peak buying. I admit it is not easy finding something that comes close to the 1 percent rule here in the Baltimore Metro area of Maryland but believe me, they are out there.
What is the 1 Percent Rule?
According to Investopedia, the 1 Percent Rule is “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 1 percent rule is a way for the investor to quickly calculate the monthly rent to ensure that it at least covers the mortgage, so the investor breaks even on the property at worst. The rule is used only for quick estimation though, as there are other costs associated with a piece of property that are not taken into account, such as operating costs, insurance and taxes. After calculating these additional costs, a rental property that initially passed the 1% rule could still end up being a very bad investment.
How does the 1 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, let’s say 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 1 percent rule says that the home would have to be rented out for no less than $1,600 per month ($160,000 * .01).
It is tough to buy a house as a rental based solely on the 1 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. Depending on your market, it may be tough to rent the house for $3600 per month in that area if comparable rentals are going for $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%.
The point is, that the 1% rule should be used 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% 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.
At Roxbury Mill Properties, LLC We specialize in purchasing distressed homes at a discount, renovating and reselling. In this way we not only help homeowners out of difficult situations but also improve the community by providing affordable housing that attracts new homeowners or landlords to these neighborhoods.
Through our extensive knowledge of the business, our network of resources, and years of expertise, we are able to assist homeowners and Landlords with a wide variety of real estate problems. We pride ourselves on working one-on-one with each customer to handle their individual situations.
With the ability to directly purchase homes and make cash offers, we can create an extremely fast, and hassle-free transaction.
Are you a new Investor or a seasoned Landlord looking for great rental properties in the Baltimore Washington Metro Area? Give us a call today at (410) 648-4800 and let’s talk about what we can do to help you.