The 1% Rule - Fastest Rental Property Analysis

If you don't have the time to deep dive into every real estate deal that it is out there you need to know how to use the 1% rule!

​Here is how it works..

When you are just starting out it is extremely helpful to look into and analyze a lot of deals. You quickly know which ones are the best so you can act quickly when they pop up! Understanding how to use the 1% rule allows you to filter out the potential bad ones almost instantly.

The 1% rule is the idea that you'll get 1% of the purchase price in monthly rental income. 

For example, if you buy a house for 100,000 you'll want the rent to be at least 1,000 a month. That is it. That's the rule.

This will cover your Principal Mortgage, Interest, Taxes, Insurance (PITI) but also cover your not as obvious costs like repairs, vacancy, capital expenditures (big ticket items like roof, HVAC, water heater, etc.), property managers, water, utilities, landscaping, etc. The 1% rule is thought of as a defensive measure and not necessarily added income to live off - unless you have reserves. 

If you want a real life example let's look at my second deal which falls into the 1% rule.

Purchase Price: $83,524
Monthly Rental Income: $900
Principal, Interest, Taxes, Insurance: $520 a month

That doesn't look like life changing money but seems like a decent return until you factor in saving for those other costs. In theory you’ll want to save at least 10% for vacancy, 10% repairs, 8-10% for management fees, and 5-7% for Cap Ex.

When you add in those added costs let's look at those numbers again. 

Purchase Price: $83,524
Monthly Rental Income: $900

Principal, Interest, Taxes, Insurance: $520 a month
Vacancy: $90
Repairs: $90
Property Management: $75 (that is the actual cost of mine)
Cap Ex: $60

Total Expenses: $835
Cashflow: $65

However, even with saving 25% if an AC unit goes out $250 a month isn’t going to do a whole lot.

​Summary

The 1% rule is making sure your rental property will get 1% of the purchase price in monthly rent. This helps to quickly analyze whether a deal will be "good" or not. This will help to ensure that you have enough cash coming in to not lose the property if things start to go wrong. 

This rule isn't the end all be all of investing as buying homes in California, New York City, or the Bay Area may not make sense and people are still doing that. It should be used as a quick filtering tool to help decide whether you want to analysis a property further and I'll be working on a post to determine when is the right and wrong time to use it. ​

If you are looking for more material on ways to begin real estate investing or analyzing a deal here are some books I recommend. ​

​**This post contains affiliate links. If you make a purchase through one of my links, I will receive a small commission at no extra cost to you and allows me to keep the lights on around here. All thoughts and opinions are my own. ​​ ​​

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