What You Need To Know About The 1% Rule When Investing In Real Estate.
If you have been considering investing in real estate and reading about it online you may have heard other investors talking about the elusive 1% rule...
What exactly is the 1% rule?
It’s a simple real estate calculation that gives you a good first glance if a rental property is worth more of your time and due diligence, or if you should pass on the property. This rule is used by many seasoned real estate investors.
If you are like most real estate investors, you may have a goal of financial freedom and monthly residual income. Your goals are achievable and the 1 % rule is a good formula to start with when quickly analyzing your potential investment property.
Remember, this is just a quick formula to determine if the deal is worth more of your time. You will still need to do a lot more research before you buy the property.
Let’s take a closer look at the 1% rule…
This formula will give you an indication if your potential deal can give you a monthly cash flow that is 1% or more of the total purchase price.
Now just like many other real estate calculations this formula can be different depending on how you calculate the total cost of the property. Some investors include renovations, repairs, and closing costs into the calculation.
This is how you calculate the 1 % rule on a real estate transaction.
Let’s assume that you are buying a 4 unit property in St Catharines, Ontario, Canada for $500,000
PROPERTY PURCHASE PRICE X 1% = MONTHLY RENT
$500,000 X 1% = $5,000
That’s it! Very Simple!
But keep in mind that depending on the area you are investing in it may be hard to achieve this rental income and even if it meets the 1 % criteria you still need to do more research to determine if the property is worth buying.
You can use the 1% rule for, single family rentals, duplexes, triplexes, etc. It’s a great starting point when analyzing a bunch of properties quickly to see what ones are worth more time.
Here are a few other points to consider when looking for great cashflow properties…
Location: What is the city/area like?
Jobs: is there good paying jobs in the area? Multiple sectors to stimulate the local economy?
Rental Market: What is the vacancy rate in the area? How long has the property been on the market.
Property value: Are properties in the area appreciating in value
Transportation: Roads, buses, subway, go stations, airports, etc?
Property Inspection: What is the overall condition of the property
Fire Code: Is the property up to code and safe for your tenants
Zoning: Does the property permit the current use? Is it legal or legal non conforming?
As mentioned before there are also many other expenses to consider such as closing costs. Did you include these into your total cost?
Another important expense you want to consider is operating cost!
All rental properties will have ongoing operating expenses that need to be factored into your decision. If you find a property that meets the 1% rule you have a nice rental income to help cover these expenses.
Many new investors forget to consider these when analyzing deals.
Condo Fee (If applicable)
Emergency fund (I recommend a minimum of 3 months carrying cost on the property)
So as you can start to see there are many factors that need to be analyzed before making a buying decision...
Bottom line is that if you find a property that meets the 1 % rule it's worth some more of your time. This is a good screening formula for real estate investors.
Use the 1% rule as a starting point to analyze your real estate investing deals. If you need help or have further questions about the 1% rule reach out any time!
To learn about other real estate formulas click HERE
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