The 1% Rule Of Real Estate Investing
The 1% rule is used by many real estate investors and is a tool for every investor’s interest. This article will look at what is the rule, how useful it is and how to use it effectively.
It is a rule of thumb that investors use and basically means that a property should cash flow 1% of the purchase per month. Investors use it because it is quick and easy to use. When a property meets this rule it means that there is a potential for profit. The way to calculate it is to multiply the listing price into 1%/0.01, if the rent found is higher than that number it meets the 1% rule.
Gross rental income should be used while calculating this. Gross Rent Multiplier can also be used for this calculation to compare the properties that have already met the 1% rule, it is equal to the listing price divided by the annual rental income. It is compared with the time it will take to get your investment back in years.
Real Estate investors use this technique as it helps in finding good deals in minutes. When the property meets the 1% rule it equals that you will get a profit even after taking into consideration or property taxes, repairs etc. However, it does not imply that the property is automatically a good investment, it is just an indicator for potential profit. Once the property has passed the rule, the other criteria’s to look at are:
- Property taxes– When buying property it is essential to look at the interest rates otherwise it can consume your profits.
- Repairements– It is essential to look at the amount of repairments and changes to be made in the property, as a good deal can turn into bad when if the price of repairment is too high.
- Vacancy Rates– 1% rule assumes that you will have tenants, if no person wants to be a tenant at your property it will equal to a bad investment, even if you are getting s higher percent that 1%.
How to use the 1% Rule
If you are planning to invest in real estate you will maybe look at tens of different types of properties and this tool will help you distinguish the properties that will give you good returns from the ones that will not. However, keep in mind that rents are not a specific number and vary in range so the rule is not very precise.
The method that is more advisable is to take the average rent of similar properties, similarities in area, condition of property and square foot. This analaysis can be done online and properties that are not worth your time are discarded. Once there are a couple of properties that meet the 1% criterion you can do a through research on those, keeping in mind the property tax, repairment etc.
This tool is just a rule however if it is used correctly, it can save a lot of your time when looking for a property to invest.