The 1% rule is a rule of thumb that real estate investors use to quickly assess the financial viability of a multifamily investment property. It states that the monthly rent from a property should be equal to or greater than 1% of its purchase price.
For example, if a property costs $100,000, the monthly rent should be at least $1,000. This rule of thumb is based on the idea that a property that generates at least 1% of its purchase price in monthly rent is likely to be cash flow positive.
Of course, the 1% rule is just a rule of thumb and there are other factors to consider when evaluating an investment property, such as the property's location, condition, and expenses. However, it can be a helpful starting point for investors who are looking for multifamily properties that are likely to generate positive cash flow.
Here are some of the pros and cons of using the 1% rule:
Pros:
- The 1% rule is simple to calculate and understand.
- It can be a quick way to screen out properties that are unlikely to be cash flow positive.
- It can be a useful tool for comparing different investment properties.
Cons:
- The 1% rule does not take into account all of the factors that affect a property's cash flow, such as expenses and vacancy rates.
- The 1% rule may not be accurate in all markets.
- The 1% rule is a static rule and does not account for changes in market conditions.
Overall, the 1% rule is a useful tool for real estate investors, but it should not be used as the sole factor in making investment decisions. Investors should also consider other factors, such as the property's location, condition, and expenses, when evaluating an investment property.
If you are interested in learning more about the 1% rule or multifamily real estate investing, I encourage you to do some further research.
I hope this post was helpful. Thank you for reading!
FAQs
What is the formula for the 1% rule? For example, if a rental property's purchase price is $200,000, the 1% rule suggests that the minimum monthly rent should be $2,000. This helps investors quickly assess if a property might generate enough rental income to cover costs and be a profitable investment.
What is the 1% rule for multifamily real estate? ›
The 1% Rule:
According to this guideline, the monthly rent for a multifamily property should ideally be at least 1% of the property's total acquisition cost. For instance, if you're considering a property that costs $500,000, the combined monthly rental income should be around $5,000.
Is the 1% rule dead? ›
Recent evidence suggests that this rule is losing its effectiveness due to inflated home prices and shifts in the rental market. To better gauge investment potential, experts now advocate for a more comprehensive analysis, leaving the 1% rule behind.
What is the 4 3 2 1 rule in real estate? ›
Analyzing the 4-3-2-1 Rule in Real Estate
This rule outlines the ideal financial outcomes for a rental property. It suggests that for every rental property, investors should aim for a minimum of 4 properties to achieve financial stability, 3 of those properties should be debt-free, generating consistent income.
What is the formula for the 1% rule in real estate? ›
Multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent. Ideally, an investor should seek a mortgage loan with monthly payments of less than the 1% figure.
Is the 1% rule realistic? ›
Is The 1% Rule Realistic? Many people find the 1% rule helpful, but there are some shortcomings with using this strategy. For one thing, properties that fail to meet the 1% rule are not necessarily bad investments. And likewise, properties that do meet the 1% rule are not automatically good investments either.
What is the 1% rule example? ›
The 1% rule states that a rental property's income should be at least 1% of the purchase price. For example, if a rental property is purchased for $200,000, the monthly rental income should be at least $2,000.
What is the 50% rule in real estate? ›
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
What is the 90 10 rule in real estate? ›
He explained how investors can leverage strengths in one area to complement others, fostering balanced and effective partnerships. Roger shared his 10/90 rule, balancing risk by investing 10% in higher-risk projects and 90% in stable, cash-flowing properties.
What is the 80% rule in real estate? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
In case you haven't heard of the so-called Golden Rule in house flipping, the 70% Rule states that your offer on a property should be no greater than 70% of the After Repair Value (ARV) minus the estimated repairs.
What is the 2% rule in real estate? ›
The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.
What is the Brrrr method? ›
What is BRRRR, and what does it stand for? Letter by letter, BRRRR stands for “Buy, rehab, rent, refinance and repeat.” It's like flipping, but instead of selling the property after renovation, you rent it out with an eye on long-term appreciation.
What is the 1 or 2 percent rule for rental property? ›
In real estate investing, two commonly referenced guidelines are the 1% rule and the stricter 2% rule. Simply put, these guidelines dictate that a property's gross monthly rent should amount to 1% or 2% of its purchase price respectively.
What is the 3% rule in real estate? ›
1%, 2% or 3% rule is a gage of measuring if the investment would be profitable. The comparison is between the gross rent and the purchase price. 50% rule relates to quick reference practice of estimating your operating expenses so you can arrive at your NOI (net operating income). 1. Realty Circle.
What is the 100x rent rule? ›
Savvy real estate investors often pay no more than 100 times the monthly rent to purchase a property. In the case of the couple above, an investor following the 100 times monthly rent rule wouldn't pay more than $750,000 because the monthly market rent was $7,500.
