The 1% Rule of Thumb for Analyzing Investment Properties

How do you know if a deal is a deal?

The answer, of course, depends on your personal preferences, financial goals, and risk tolerance. Luckily, there is a shortcut or rule of thumb that can help provide a preliminary answer quickly.

But first, let’s look at the numbers. While the purchase price is the most important number, you can’t fully evaluate a deal until you estimate several more. A savvy investor will answer these key questions with ballpark figures that help calculate important return metrics like cash-on-cash return and capitalization rate.

Revenue

How much are rents for comparable properties?
What is the area’s vacancy rate?

Expenses

How much are the property taxes?
What operating costs does the landlord cover versus the tenant?
How much is insurance?
What should I reserve for ordinary maintenance and repairs?
How much will a property manager cost if I don’t self-manage?
What long-term capital expenditures should I save for?
Are there any immediate repairs needed upon closing?

Financing Expenses

How much will I need for a down payment?
What interest rate can I expect?
How much are the closing costs?

The 1% Rule

Once you’ve gathered these numbers, you can use a simple rule of thumb to quickly assess a property’s potential: the 1% rule.

You only need two inputs:

Purchase price – Use the list price.
Monthly rent – Use actual rents (if unavailable, use comparable rented properties; if still unavailable, use asking rents from current rental listings).

Simply multiply the purchase price by 1% (or 0.01). The result should be close to the monthly rent.

For example, if a property is listed for $100,000, applying the 1% rule means it should ideally rent for at least $1,000 per month. If the rent is only $800, the property may not generate enough income to cover expenses and still provide a profit.

Why the 1% Rule Matters

The 1% rule serves as a quick screening tool to determine whether a property has the potential to generate positive cash flow after covering expenses, including vacancy, maintenance, and capital expenditures. However, it is only an approximation. Judgment and further projections will determine if a property is truly a good deal.

For instance, if a property currently rents for $800 but market trends suggest you could raise it to $1,000 within two years, it may still be worth considering. Similarly, all properties can theoretically meet the 1% rule by adjusting the purchase price. A home generating $800 in monthly rent may not be attractive at $100,000 but could be a great deal at $80,000.

Even in higher-cost markets like Massachusetts, opportunities that meet the 1% rule do exist. At Blackacre, we specialize in identifying these properties for our investor clients. If you’re looking for investment properties that align with your financial goals, reach out to us today!