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’s sale price.
While the 1% rule can be a helpful metric for investment properties, it’s 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.
This post will detail the 1% rule, what it doesn’t account for, and other metrics you should consider.
How the 1% Rule Works
The 1% rule helps you calculate how much rent you should charge a tenant. The rule accounts for the property’s 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’d instead charge $1,250 per tenant.
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’re charging in rent, then, in theory, it’s probably not an ideal investment.
What the 1% Rule Doesn’t Account For
If the 1% guideline was your only necessary calculation, you’d make your money back in 100 months or 8.33 years. However, real estate investing is far more complex than that. Here’s a list of just some of the things that aren’t factored into the 1% rule:
- Mortgage interest rates
- Homeowner’s Association (HOA) fees
- Insurance premiums
- Property taxes
- Property management fees
- Ongoing property maintenance and repairs
- Atypical markets, such as San Francisco, New York, and other large cities
- Utilities
- Legal fees
- Additional income from rent, laundry, storage, etc.
- Marketing
- Vacancy periods
- Cash reserves
- Appreciation
- Depreciation
- The real estate market (in general)
- Rent increase per year
- Expense growth per year
Dave Meyer…