Is the 1% rule still applicable in this market?

At 26, when I bought my first income producing rental property I wished I had known a few basic principles to investing in real estate. The only thing I knew was that everyone I had known growing up that owned real estate, which wasn’t anyone in my family, was rich to me.

This was the whole reason for me to like real estate and want to invest in it. Nowadays, knowledge on investing and real estate in general is everywhere, but 17 years ago, this just wasn’t the case.

Years later, I learned something called the 1% rule. The 1% rule in real estate investing means this. You should be able to rent a property that you purchase for at least 1% of the value of that property.

Example: Property purchased for $100,000 x 1% (.01) = $1,000. This property should be able to generate at least $1,000 a month in rent.

It’s pretty simple. If you put 20% down on $100,000 house. Your mortgage will be $80,000. Let’s say you have 5% interest rate on it. Your mortgage payment is roughly $450. Add in taxes and insurance, which might be another $150 a month. You are now at a payment of $600 or so.

Again, there are a lot of variables here. But you get the point.

I wish I would have known this when I bough my first property I mentioned earlier.

I am sure the critics out there are now saying is the 1% even feasible anymore in today’s market?

I say yes. With some caveats. Years ago I could buy properties in B- neighborhoods and easily get the 1%. However, in the last few years, I have had to downgrade some in to C- neighborhoods to get the 1%. These purchases were in areas I wouldn’t have considered before, but if you are committed to the 1% as a strategy then you have no choice.

However, my point here is clear. You have to come up with your own investment strategy. I have been telling people this for years.

I wrote an earlier post on all the ways income producing real estate makes you money. You can access that article here. Decide what your strategy is and then go look for properties that fit that strategy. Nicer places in better neighborhoods may not fit the 1% rule, but overtime they may appreciate more. And you may have less turnover in the unit and less maintenance.

So the question is can you still find properties that fit the 1% rule? I would answer, yes. However, they may not fit other criteria you may have. Like location and tenant base. Or they may be in other states than you are currently considering.

When it comes to multifamily properties does the 1% rule still apply? For me it does. Now, when I do a full underwriting of a multifamily property I will look deeper into the financials. But when I do a quick back of the napkin underwriting of a deal on whether or not I want to look at it deeper. I will look at what are they asking per door. And what is the rent they are getting per door.

If it is close. Then I will dig deeper into the deal.

One of my mentors says it like this. He says if you can find a property that gets .005% or a half a percent, he said buy all you can. Because it is worth it over time.

And if you take nothing a way from this post, I would say this.

Don’t wait to buy real estate, buy real estate and wait. Because it is the one investment that has proven itself over and over that it goes up over time.

What are your thoughts?

To your success and your future.