The one percent rule is a simple concept and a powerful tool for real estate investing. It can also be applied to condo ownership, which can help you get the most out of your investment.
The one percent rule is an easy way to determine if an investment property is worth buying. Read this article to learn more about the one percent rule in real estate.
Why should you start owning an investment property?
Considering that real estate appreciates over time, it is one of the safest investments suited for beginners out there!
Real estate typically grows at a rate of 3 to 5% per year which is a great deal, and all you have to do is maintain and sustain your real estate property! That easy and simple right?
After all, a well-kept property is more appealing to potential tenants. Additionally, if some of the maintenance budget is unused, it could be added to the profit. You could also set it aside for future operating costs.
Increased Opportunities of Earning Consistent Cash Flow
Real estate investments generate monthly cash flow by renting out your real estate properties! Instead of waiting for property values of your investment property to rise over time, you can generate cash flow through rental income.
You can expect a positive cash flow through rental income because you does not solely rely and wait for property’s price appreciation to shoot up but you can anticipate a monthly rental income, and eventually sooner, a rent appreciation!
Active real estate investors are familiar with the term percent rule, but what about those who have not come across such terminologies but intend to get involved in and try real estate investment?
What is the 1 percent rule in real estate investing?
The one percent rule is a strategy used in real estate investing in determining the so called cap rate. Calculating the one percent rule is just easy as investors just need to multiply the property purchase price by 1 percent to evaluate the profitable property.
Cap rate or capitalization rate indicate the rate of return expected on a real estate investment property. It is calculated by dividing the property’s net operating income by the current market value.
On the other hand, the net operating income is a formula used by real estate professionals to quickly calculate the profitability of an specific investment.
In addition, the net operating income is your gross rental income subtracting operating expenses, taxes, maintenance and repair costs, but it does not involve your mortgage payment.
This percentage ratio estimates the potential return on a real estate investment, or the cash on cash return on investor.
When to Use the One Percent Rule In Real Estate?
So when do we apply percent tule particularly the one percent rule? Investors used the one percent rule when evaluating rental properties. It works by calculating the monthly rent and it should be at least 1 % of the total purchase price for it to be considered as a good investment property.
The one percent rule is applied when assessing potential rental properties. When evaluating a diverse range of multiple properties, these percent rules can be a big help in narrowing down your options and identifying properties with good investment potential.
However, as a real estate investor you should not be dependent and heavily reliant on the one percent rule as it should not be used as a deciding factor when deciding whether or not to invest in a property.
Instead, what you should do is to be wise and meticulous enough to consider inspecting the location of the property as well as the neighborhood, the property’s current condition, and the current market trends.
Reminder that the one percent rule should just be used as a helping hand when evaluating potential profitable property.
Using the 1% rule for rental property
So, how does the one percent rule works in rental property?
This simple formula multiplies the purchase price of the real estate property by 1%, plus all the repair costs. The resulting figure should be the minimum monthly rent you should charge for your rental property. This determines whether the monthly rent collected from an investment property will exceed the monthly mortgage payment.
The goal of this one percent rule is to ensure that the monthly rental payment is greater than or equal to the mortgage payment, allowing the investor to at least break even on the investment.
To ensure that the investor at least breaks even on the property, the monthly rent prices should be equal to or greater than the investor’s mortgage payment.
To calculate the rental income obtained from monthly rent, multiply the property purchase price plus any necessary repair cost by 1%.
Real Estate Investors Metrics
When assessing real estate investment choices, many investors consider other metrics that could help them make good decisions with regards with their investment properties. One of these metrics is the gross rent multiplier that is widely used in real estate industry.
Gross Rent Multiplier
The gross rent multiplier is a calculation that can be used to determine how long it will take to pay off a rental property. This compares your annual rental income to the fair market value of a property.
Gross rent multiplier is a tool that helps many investors in determining the profitability of a rental property when they are looking at a list of multiple properties at hand.
However, it is not used as a replacement for percent rule particularly the one percent rule. To be clear, gross rent multiplier is use to support the one percent rule in assessing the profitability and possible return of investments of rental property.
The formula in using the gross rent multiplier would be to get Gross Rent Multiplier, you will need to divide the property purchase price or value by the gross rental income. It compares the rental property opportunities in a given market.
A Property That Meets the One Percent Rule
Presume you want to buy an investment property listed for Php 480,000.00 with a monthly rent of Php 5000.00. The monthly rent should be equal to or greater than Php 4,800.00 per month, abiding by the one percent rule in real estate investing.
Going back to the equation, this property meets the 1% rule because tenants are charged with rental fee of Php 5000.00 per month.
The rental property meets the 1 % rule, therefore it can be considered as a potential profitable investment property. That was one simple and quick calculation process of evaluating investment property.
When considering an investment property, it is critical to understand how much of a return on investment the home can provide. To put it another way, it is critical to understand what you are getting into before purchasing investment properties.
Now that you have learned strategies that could help you weigh your investment options and make wiser decisions, it is time for you to embark on your real estate investment journey.
Is the 1% Rule Still Useful Today?
Overall, the one percent rule is not guaranteed but it is a useful tool that helps investor evaluate and weigh whether a real estate property is worth a good investment or not, if and only if the property passes the one percent rule. It aids in narrowing down your options at hand of real estate properties from a list of multiple properties.