Curious about evaluating real estate investments and turning properties into profitable rental opportunities? In this video, Kaycee from Rentec Direct dives into the 1% rule for real estate investments and explains how this simple yet powerful tool can help you quickly assess whether a property could generate positive cash flow as a rental.
Evaluating potential real estate deals is a skill set that savvy investors need to hone for the biggest ROI. When it comes to evaluating a potential investment, having a reliable go-to tool in your pocket can make all the difference. Enter the 1% rule for real estate investments. Follow along with real estate expert and investor, Kaycee Miller in this video as she goes over the 1% rule and how to utilize it when examining a potential deal.
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The 1% Rule for Real Estate Investments – Video Transcript
Are you someone who likes to look at real estate listing sites and consider different properties, whether they might be a potential real estate investment or maybe you’re just looking at it daydreaming, which is always fun to do too?
But when I’m looking at real estate listing sites and considering whether or not a property is gonna be a good real estate investment in terms of making it into a positive cash flow rental property, there’s one tool I like to use as my initial instant evaluation on whether or not I can should consider that deal further and take the next step in further calculations.
And that is the 1% rule.
My name is Kaycee. I work with Rentec Direct property management software. I’m also a landlord, a real estate investor, a real estate developer, and I’ve been writing about real estate-related topics for over a decade.
What Is the 1% Rule in Real Estate?
Today we’re gonna talk about the 1% rule when it comes to evaluating potential real estate investments in deciding whether or not that’s gonna be a good profitable rental property.
So the 1% rule is pretty simple. Basically, you look at a listed purchase price, you take 1% of that price, and decide whether or not you think your market can sustain that 1% of the purchase price as a potential monthly rental income.
An Example of the 1% Rule
Let’s take some really simple numbers for this. Let’s say there’s a property that is listed for $200,000.
1% of that $200,000 would be $2,000.
So, does your market sustain or could that property realistically charge $2,000 per month in rent? If so, you have the potential for a good real estate investment.
Factors Beyond the 1% Rule
Now, there’s so much more that goes into determining whether or not a property could generate certain rental income besides just this 1% rule.
We’re talking additional expenses. Does the property need maintenance? Are there HOA fees? What does insurance look like? What does property tax look like? That all goes into additional calculations that really help you determine whether or not a property might be a good investment.
When you’re also looking at rental property rates for the monthly rental income, there are lots of other factors that could come into that.
- How many bedrooms are there?
- What’s the square footage?
- What neighborhood is it in?
- What kind of renters can you attract?
Class of Property
There’s different classes and properties that say, you might say it’s a class A, class B, or class C property. That usually has to do with the level or quality of property and maybe what kind of neighborhood it is or what condition it’s in.
So, is the property in the class group that you want it to be? And is it in a class that can generate the rental income that is equivalent to that 1% of the property?
Next Steps when Using the 1% Rule
Once we determine a 1%, that’s where I usually say take the next step.
And I go to my partner and I say, “Okay, I think this hits that 1% rule. Let’s continue to go to the next step and do a cap rate analysis to determine if this could be a good investment for us.”
And if it is, it’s a deal that we wanna make an offer on.
Changes in Market Conditions
Now, the 1% rule used to work really, really well in our neighbor or area and in the market where we own a lot of our rental properties because 10 years ago prices were very different in our area.
Now 1% doesn’t work so well.
So, when I do see a 1% opportunity, I’m quick to jump on it and take that next step in evaluating.
Does the 1% Rule Work in Every Market?
There are lots of markets across the country where 1% might work. But there are other markets where it definitely might not work.
Think about properties that might cost a million dollars to buy. Can the market rent sustain 1% of that million dollars for a monthly rent?
It just kind of depends on where you’re living.
Or other places that might have super luxury real estate, they might be able to sustain that 1% of a very expensive piece of real estate.
Using the 1% Rule as an Initial Evaluation
It definitely depends on a lot of factors, but I like to use that 1% rule as the initial evaluation that I make.
Other Tools for Real Estate Evaluation
Some of the other tools real estate investors use for making decisions on that first step towards evaluating whether or not a real piece of real estate is gonna be a potentially good investment are:
- The 1% rule
- Considering gross yield
- The cash-on-cash return
- Doing a cap rate analysis
- Using something called the 50% rule
Want to Learn More?
If you’re interested in learning about any of those other real estate evaluation tactics that some of my investor network use for determining if a property is gonna be a good investment, let me know.
My name is Kaycee. I work with Rentec Direct. I talk about everything from real estate investing to being a landlord and property management tips on the Rentec Direct Blog.
Please check me out there, and I’ll see you next time.