In this video, I talk about the 1 percent rule also known as the 100 times rent rule.
This is basically a back of the envelope quick way to estimate whether or not a rental property will cash flow. The goal is to pay no more than 100 times rent for a property.
If you are a student of mine I cover this topic in my Home Study Course
Example:
*House rents for $2,000 per month
*Pay no more than $200,000 for that house
It’s important to understand that what you pay is the “all in cost” meaning your purchase price plus closing costs plus all repairs and this number should be no more than 100 times rent.
There are a few key things to note about the 1 percent rule. The first is that different areas of the country will have different rent multiples. For this reason, some investors will say that the 1% rule is “unrealistic” in today’s market. In certain higher-priced areas (like Miami) it will be almost impossible to find a property that meets the 1 percent rule.
However, there are many parts of the country where you can easily find rental properties that meet the 100 times rent rule. When you invest you can buy properties that cash flow or you can buy properties and hope they will go up. The latter is a losing strategy.
If you are going to buy an investment property it will need to cash flow. And the 1 percent rule is a very good rule of thumb that will help keep you out of trouble. Start out with a mortgage calculator (like I do in the video) and calculate what your monthly payments will be for a property (including taxes and insurance, repairs and maintenance). You will need to have a healthy margin of rent above what your monthly payments will be or you won’t cash flow.
Here is an example of a property that I purchased 5 years ago.
That property was purchased as an REO from a bank. It was selling at just 50 times rent. In my experience that is the bottom of the market (where you want to be buying). That same property today was listed for $240,000 (the monthly rent was $1,200). That price represents 200 times rent. I doubt the buyer who pays $240,000 will keep that property or make money with it.
The first rule of real estate investing is to buy properties at a discount (with equity). You do that by focusing on and marketing to homeowners with damaged properties that need work. For example hurricane damage, flood damage, and fire damaged houses.
You can also buy houses with equity by buying distressed properties where the home owner is in some kind of financial hardship. For example an inherited house that the new heir wants to sell quickly, probate houses, foreclosures, pre-foreclosures, short sales and bank owned properties.
The second rule of real estate investing is to make sure that you can cash flow. If you are buying with a private lender or using hard money, then you need to know that when you refinance you can cash flow. Use the prevailing interest rates and a mortgage calculator like I do in this video to learn how to calculate that.
If you want to learn how to buy properties at a discount with equity, then make sure you register for my next Wholesaling Real Estate Boot Camp where I teach the basics of how to find these types of properties at a discount, distressed real estate, comparable sales, After Repair Value, Repair Estimates and calculating how much to offer on a property. Click the button below to learn more or call our office to reserve your seat today 561-948-2127!
