{"id":7762,"date":"2023-05-25T22:42:00","date_gmt":"2023-05-25T22:42:00","guid":{"rendered":"https:\/\/imsfund.com\/?p=7762"},"modified":"2023-05-25T22:42:00","modified_gmt":"2023-05-25T22:42:00","slug":"1-rule-what-it-means-for-real-estate-investors","status":"publish","type":"post","link":"https:\/\/imsfund.com\/index.php\/2023\/05\/25\/1-rule-what-it-means-for-real-estate-investors\/","title":{"rendered":"1% Rule: What It Means For Real Estate Investors"},"content":{"rendered":"<p> <br \/>\n<\/p>\n<div :class=\"{ 'hidden': $store.proContent.showFullPrompt() }\">\n<section class=\"px-4 relative border border-slate-200 mobile-toc lg:hidden\" x-data=\"{open:false}\">\n<button class=\"flex items-center gap-4 my-2 border-none w-full\"><br \/>\n<svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"h-6 w-6\" fill=\"none\" viewbox=\"0 0 24 24\" stroke=\"currentColor\" stroke-width=\"2\"><path stroke-linecap=\"round\" stroke-linejoin=\"round\" d=\"M4 8h16M4 16h16\"\/><\/svg><\/p>\n<h2 class=\"font-semibold text-slate-800 text-base m-0 js-toc-ignore\">In this article<\/h2>\n<p><\/button><\/p>\n<\/section>\n<p>The 1% rule is a real estate investment guideline indicating the minimum monthly rent you must charge to break even on a rental property. The rule states that your rent should be at least 1% of your property\u2019s sale price.\u00a0<\/p>\n<p>While the 1% rule can be a helpful metric for investment properties, it\u2019s meant to be more of a filter than anything. You should take it with a grain of salt, especially when accounting for current home prices.<\/p>\n<p>This post will detail the 1% rule, what it doesn\u2019t account for, and other metrics you should consider.\u00a0<\/p>\n<h2>How the 1% Rule Works<\/h2>\n<p>The 1% rule helps you calculate how much rent you should charge a tenant. The rule accounts for the property\u2019s purchase price plus the cost of necessary repairs. For example, if you purchase a home for $230,000, then spend $20,000 on repairs, you should charge your tenants $2,500 monthly if you follow the 1% rule. If your property is duplex, you\u2019d instead charge $1,250 per tenant.\u00a0<\/p>\n<p>The guideline can give you a basic idea of whether or not a property is worth investing in. If your mortgage payment is going to be greater than what you\u2019re charging in rent, then, in theory, it\u2019s probably not an ideal investment.<\/p>\n<h2>What the 1% Rule Doesn\u2019t Account For<\/h2>\n<p>If the 1% guideline was your only necessary calculation, you\u2019d make your money back in 100 months or 8.33 years. However, real estate investing is far more complex than that. Here\u2019s a list of just some<em>\u00a0<\/em>of the things that aren\u2019t factored into the 1% rule:\u00a0<\/p>\n<ul>\n<li>Mortgage interest rates<\/li>\n<li>Homeowner\u2019s Association (HOA) fees<\/li>\n<li>Insurance premiums<\/li>\n<li>Property taxes<\/li>\n<li>Property management fees<\/li>\n<li>Ongoing property maintenance and repairs<\/li>\n<li>Atypical markets, such as San Francisco, New York, and other large cities<\/li>\n<li>Utilities<\/li>\n<li>Legal fees<\/li>\n<li>Additional income from rent, laundry, storage, etc.\u00a0<\/li>\n<li>Marketing<\/li>\n<li>Vacancy periods<\/li>\n<li>Cash reserves<\/li>\n<li>Appreciation<\/li>\n<li>Depreciation<\/li>\n<li>The real estate market (in general)<\/li>\n<li>Rent increase per year<\/li>\n<li>Expense growth per year<\/li>\n<\/ul>\n<p><a href=\"https:\/\/www.biggerpockets.com\/blog\/1-percent-rule-dead\" target=\"_blank\" rel=\"noreferrer noopener\">Dave Meyer<\/a> pointed out that the 1% rule is an outdated suggestion created in a different market. While it was a great metric to use shortly after the financial crisis, it\u2019s not as helpful today. If you\u2019re basing your investment strategy solely on the 1% rule, you\u2019ll miss out on many potentially great investments with rent-to-price ratios below 1%.<\/p>\n<h2>Alternatives To The 1% Rule<\/h2>\n<p>Many investors analyze dozens\u2014if not hundreds\u2014of deals before investing in any single one. In their initial research stage, investors try to quickly disqualify properties that don\u2019t meet certain thresholds before getting into the nitty gritty.<\/p>\n<p>While you\u2019ll never know exactly how much you\u2019ll make on an investment, a few other calculations you can make will help you narrow your search when determining what you invest in.\u00a0<\/p>\n<h3>Cash flow<\/h3>\n<p>Focusing on an immediate return may make your monthly cash flow a better metric.\u00a0<\/p>\n<p><a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/rental-property-cash-flow-analysis\" rel=\"noreferrer noopener\">Cash flow<\/a>\u00a0calculates your gross monthly cash flow minus your total operating expenses. Typically, \u201cgood\u201d cash flow is when you net $100-$200 per unit monthly. However, that all depends on how much your initial investment is. If you\u2019re making $200 monthly on a $100,000 investment, that\u2019s not an attractive return. However, if you\u2019re making $200 monthly on a $10,000 investment, that\u2019s a 2% monthly return.\u00a0<\/p>\n<p>Here\u2019s how to calculate cash flow:<\/p>\n<div class=\"is-layout-flex wp-container-6 wp-block-columns\">\n<div class=\"is-layout-flow wp-block-column\" style=\"flex-basis:100%\">\n<div class=\"is-layout-constrained wp-block-group\">\n<div class=\"wp-block-group__inner-container\">\n<div class=\"wp-block-group__inner-container\">\n<div class=\"is-layout-flex wp-container-3 wp-block-columns\">\n<div class=\"is-layout-flow wp-block-column\" style=\"flex-basis:100%\">\n<div class=\"is-layout-constrained wp-block-group\">\n<div class=\"wp-block-group__inner-container\">\n<figure class=\"wp-block-table is-style-regular\">\n<table>\n<tbody>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\"><strong>Gross monthly cash flow<\/strong><br \/>(including rent and additional income, such as parking, pet fees, etc.)<\/td>\n<td><strong>$2,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\"><strong>Operating expenses<\/strong><\/td>\n<td\/><\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\">Monthly mortgage payment (principal and interest)<\/td>\n<td>$950<\/td>\n<\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\">Property taxes<\/td>\n<td>$150<\/td>\n<\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\">Homeowner\u2019s insurance<\/td>\n<td>$50<\/td>\n<\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\">Property management fees (10% of rental income)<\/td>\n<td>$200<\/td>\n<\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\">Repair reserves budget (10% of rental income<\/td>\n<td>$200<\/td>\n<\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\">Vacancy reserves budget (5% of rental income)<\/td>\n<td>$100<\/td>\n<\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\">Additional expenses (e.g., other insurance, gas\/mileage, supplies, etc.)<\/td>\n<td>$100<\/td>\n<\/tr>\n<tr>\n<td class=\"has-text-align-left\" data-align=\"left\"><strong>Net monthly cash flow<\/strong> <strong>(or net operating income\u2014NOI for short)<\/strong><\/td>\n<td><strong>$250<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<p>Based on these calculations, you will make $250 each month or $3,000 per year, not including any tax benefits. Cash flow can tell you how much you make monthly, but this knowledge only gets you so far.\u00a0<\/p>\n<h3>Cash-on-cash return<\/h3>\n<p>Most investors prefer to calculate cash-on-cash returns.<\/p>\n<p>Your cash-on-cash return is how much money you profited in annual pre-tax cash flow divided by how much you initially invested. Cash-on-cash return calculates the percentage of the investment you made back this year in cash flow. It\u2019ll help you determine if that $250 per month you\u2019re making in profit is worth it. Most investors prefer this method of calculating their operating income.\u00a0<\/p>\n<p>Let\u2019s say you purchased a property for $200,000. You put 20% down ($40,000), paid 2% in closing costs ($4,000), and made another $6,000 in repairs. Altogether, you spent $50,000. If your new annual cash flow is $3,000, then $3,000 \/ $50,000 = your cash-on-cash return of 6%.<\/p>\n<p>If this property was a duplex and you made $500 monthly instead, your cash-on-cash return would be 12% ($6,000 \/ $50,000). You\u2019ll want to aim for a cash-on-cash return between 10-12%, preferably closer to 12%, to outpace the\u00a0<a target=\"_blank\" href=\"https:\/\/www.sofi.com\/learn\/content\/average-stock-market-return\/#:~:text=Average%20Market%20Return%20for%20the%20Last%2030%20Years&amp;text=Looking%20at%20the%20S%26P%20500%20for%20the%20years%201992%20to,%25%20when%20adjusted%20for%20inflation).\" rel=\"noreferrer noopener\">S&amp;P 500<\/a>\u00a0and other popular stock market funds.\u00a0<\/p>\n<p>Keep in mind this is your annual pre-tax cash flow. It doesn\u2019t account for your tax burden or depreciation. Your cash-on-cash return never accounts for the following:<\/p>\n<ul>\n<li>Equity<\/li>\n<li>Opportunity costs\u00a0<\/li>\n<li>Appreciation<\/li>\n<li>Risks associated with your investment<\/li>\n<li>The entire holding period<\/li>\n<\/ul>\n<h3>Internal rate of return (IRR)<\/h3>\n<p>IRR determines the potential profitability of your property investment by estimating the entire holding period, compared to cash-on-cash return, which only focuses on the profitability of your initial investment.\u00a0<\/p>\n<p>If you\u2019re planning on holding onto your investment for a few years, calculating your IRR is probably your best bet (even though many investors prefer the simplicity of solving for cash-on-cash return). Here\u2019s a full breakdown of how to\u00a0<a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/internal-rate-return-irr\" rel=\"noreferrer noopener\">calculate your IRR<\/a>.\u00a0<\/p>\n<h2>Should You Use the 1% Rule?<\/h2>\n<p>The 1% rule was never an actual \u201crule.\u201d It was a helpful guideline once upon a time, but you can make several more accurate calculations when narrowing the scope of which properties are worth investing in. You\u2019ll likely miss many great investment opportunities if you live and die by the 1% rule. Calculate your cash-on-cash return or IRR instead.\u00a0<\/p>\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block py-4    has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n<div class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n<div class=\"relative z-30 lg:w-1\/2 \">\n<main class=\"py-4\"><\/p>\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find an Agent in Minutes<\/p>\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Match with an investor-friendly agent who can help you find, analyze, and close your next deal.<\/p>\n<p><\/main>\n<\/div>\n<div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n<picture decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block sp-no-webp\" title=\"1% Rule In Real Estate: What It Is And How It Works 2\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Agent-Finder-Block-2.webp \" type=\"image\/webp\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Agent-Finder-Block-2.png\" type=\"image\/png\"><img src=\"https:\/\/bpimg.twic.pics\/https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Agent-Finder-Block-2.png?twic=v1\/cover=500:500\/max=1000\/output=preview\" decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block sp-no-webp\" title=\"1% Rule In Real Estate: What It Is And How It Works 2\" alt=\"find an investment-friendly real estate agent\" data-twic-src=\"\/blog\/wp-content\/uploads\/2022\/08\/Agent-Finder-Block-2.png\" data-twic-src-transform=\"cover=500:500\/*\/max=1000\"\/><noscript><img decoding=\"async\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Agent-Finder-Block-2.png\" alt=\"find an investment-friendly real estate agent\"\/><\/noscript><\/source><\/source><\/picture>\n<\/div>\n<\/div>\n<\/div>\n<p class=\"italic\"><b>Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n<\/div>\n<\/div>\n<p><br \/>\n<br \/><a href=\"https:\/\/www.biggerpockets.com\/blog\/1-percent-rule-in-real-estate\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this article The 1% rule is a real estate investment guideline indicating the minimum monthly rent you must charge to break even on a rental property. The rule states that your rent should be at least 1% of your property\u2019s sale price.\u00a0 While the 1% rule can be a helpful metric for investment properties, [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":7763,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"fifu_image_url":"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/05\/1-rule_scott-graham-5fNmWej4tAA-unsplash-1024x517.jpg","fifu_image_alt":"","footnotes":""},"categories":[9],"tags":[],"class_list":["post-7762","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/posts\/7762","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/comments?post=7762"}],"version-history":[{"count":1,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/posts\/7762\/revisions"}],"predecessor-version":[{"id":7764,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/posts\/7762\/revisions\/7764"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/media\/7763"}],"wp:attachment":[{"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/media?parent=7762"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/categories?post=7762"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/imsfund.com\/index.php\/wp-json\/wp\/v2\/tags?post=7762"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}