What is 1 percent rule? Chris Watkins Real Estate Agent from Payson, UT writes on Bigger Pockets, “I understand that finding the “perfect” buy & hold property is rare.” I understand the concept of analysis paralysis vs market peak buying. I struggle to find anything that comes close to the 1 percent rule here in Utah, Wasatch, and Salt Lake counties.
What is 1 Percent Rule?
Investopedia says, “A rule of thumb used to determine if the monthly rent earned from a piece of investment property will exceed that property’s monthly mortgage payment. The aim of the 1 percent rule is to have the rent be greater or equal to the mortgage payment, so the investor breaks even on the property at worst. The rule is used for quick estimation, as there are other costs associated with a piece of property that are not taken into account, such as upkeep, insurance and taxes.
How does the 1 Percent Rule work?
Purchasing a piece of property for investment requires a thorough analysis of future rents compared to the cost of owning that property. Property owners want to maintain a cash flow greater than costs. For example, an investor is looking to purchase a home valued at $200,000, with the goal of renting the home out for income. After placing 20% down, the investor has a mortgage of $160,000. The 1 percent rule says that the home would have to be rented out for no less than $1,600 per month ($160,000 * .01).
It is tough to buy a house for a rental using the 1 percent rule unless you buy for cash. Take a house at $450,000. You put down 20% leaving you with a mortgage of $360,000. It is tough to rent the house for $3600 per month when the market is really about $2,000 per month. It might be better to purchase the property for cash and rent it for $2,000 per month for a yield of 5%.
Chris Watkins says, “I also, feel like (at least in Utah) we are at the peak of the market. Things still could go higher but I feel like I am buying high. So I am hesitant to tie up all my available down payment funds on properties in the peak of the market when, should things stabilize in the near future, it would be better to buy low if it did stabilize.”
Point is, use the 1% or 2% rule or whichever one you want only as a guideline to get you looking at a property. Once you are into the numbers of a property and evaluating it for serious purchase, the 1 or 2% rule should never be brought up. In no way should it be a justification for buying a property. Simply use it to get your list started of properties worth considering.
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