The 1 percent rule is a popular guideline that many real estate investors use to evaluate potential investment properties. It's a simple rule of thumb that helps investors quickly determine if a property is likely to generate enough rental income to cover its expenses.
The rule states that a rental property's monthly rental income should be at least 1% of its total purchase price. For example, if a property costs $100,000, it should generate at least $1,000 in monthly rental income to meet the 1% rule.
While the 1% rule is a useful tool for evaluating investment properties, it's important to note that it's not a hard and fast rule. Different markets and properties will have varying levels of rental income potential, so the 1% rule should be used as a starting point rather than a strict requirement.
So why is the 1% rule so popular among real estate investors? Here are a few reasons:
1. Helps quickly identify potential investments: With the 1% rule, investors can quickly filter out properties that are unlikely to generate enough rental income to cover their expenses. This can save time and resources in the property search process.
2. Provides a benchmark for rental income: The 1% rule provides a baseline for what level of rental income is needed to make an investment property financially viable. Investors can use this benchmark to assess whether a property's rental income potential is in line with their investment goals.
3. Helps mitigate risk: By focusing on properties that meet the 1% rule, investors can help ensure that they are investing in properties that are likely to generate positive cash flow. This can help mitigate the risk of negative cash flow and potential financial losses.
However, it's important to note that the 1% rule is not a guarantee of profitability. Investors should still conduct due diligence and thoroughly evaluate all potential investment properties before making a purchase decision.
In addition, the 1% rule does not take into account other factors that can affect the profitability of an investment property, such as maintenance costs, property taxes, and vacancy rates. Investors should consider these factors in their overall assessment of a potential investment property.
In conclusion, the 1% rule is a useful guideline for real estate investors to quickly evaluate potential investment properties. While it's not a hard and fast rule, it can provide a helpful benchmark for rental income potential and help mitigate risk. However, investors should conduct thorough due diligence and consider all factors before making an investment decision.
If you want help to determine if a property fills this rule please call us (909) 455-3601.