REAL ESTATE INVESTING – HOW TO FIND THE VALUE OF THE PROPERTY USING THE 1% RULE
July 17, 2012 By Larry Arth
So you decided that you can no longer sit on the side lines and watch everyone talk about real estate investing. There comes a time when it become obvious that you too, should get involved and take advantage of some of the best investing opportunities in your lifetime!
You have done your diligence and you have learned a lot about real estate investing. You have engaged in looking for property and are now wondering how to weed through all the properties to determine which properties you want to invest in.
Real Estate Investing Tip – Look for the 1%
First of all what the heck is the 1% rule? It is actually more of a rule of thumb. Not rocket science, but a quick look into whether one property may have merit over another property. The 1% rule is simply that your rents should equal 1% of the property’s purchase price.
Some like to say 1% of the mortgage amount. You decide what you prefer to use. I personally use 1% of the purchase price.
Either way, it lets you do a quick (while your walking the property, or driving the neighborhoods) type of assessment of the merits of the investment. When you find property you have an interest in, see if it passes the 1% rule.
As an example: When a house that rents for $1,000 a month is listed at $100,000 you have 1% of the list price coming in from revenue each month.
Note: just because a property has a price of $100,000 does not necessarily mean it will bring in $1,000 a month in revenue. This 1% rule does not negate the need for proper due diligence, but it IS a quick and easy assessment into whether the property is a good value and should be pursued more deeply or not.
Where can you get and exceed the 1% Real Estate Investing Rule?
You can look over a few properties within any geographic area or location to determine weather the properties can pass the 1% rule. If not you may want to look into other areas. Find out more… Location Due Diligence
Test the 1% rule in other locations and see what areas not only meet the 1% rule but also surpass it. The areas that provide the highest returns will most likely be your best investment. As an example, if you find an area where you can get $1,000 rents on a $70,000 purchase price, you will see that $1000 / $70,000 has a 1.42% return. This is most likely your best investment.
Most Likely? Wouldn’t it be a no brainer?
The 1.4% rule is much better than 1%, so why would this not be a no brainer compared to the 1% rule property. Here is where you want to exercise your deeper due diligence.
Let’s compare a 1% rule in an area like say Memphis or Atlanta versus an area like Florida. You may find property in all three states that have a purchase price of $100K and a rent of $1,000 a month. Therefore all the areas pass the 1% rule. Now you want to look deeper into expenses that you as an owner pay. In this example you will see expenses such as taxes and insurance in areas like Memphis and Atlanta totaling approximately $1,200 per year, while taxes and insurance in an area like Florida is closer to $2,400 to $3,000 per year.
You are getting the picture. Right?
The 1% rule is a great tool to compare property to property or location to location. Just remember to do full diligence. All too often people are so focused on the income and miss comparing the expenses.
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