The 1 Percent Rule
Chris Watkins Real Estate Agent from Payson, UT writes on Bigger Pockets, “I understand that finding the “perfect” buy & hold property is rare.” I understand the concept of analysis paralysis vs market peak buying. I struggle to find anything that comes close to the 1 percent rule here in Utah, Wasatch, and Salt Lake counties.
I even have a quote sitting on my desk right now that says “Every successful man I have heard of has done the best he could with conditions as he found them and not waited until next year for better.”
What is The 1 Percent Rule?
Investopedia says, “A rule of thumb used to determine if the monthly rent earned from a piece of investment property will exceed that property’s monthly mortgage payment. The aim of the one percent rule is to have the rent be greater or equal to the mortgage payment, so the investor breaks even on the property at worst. The rule is used for quick estimation, as there are other costs associated with a piece of property that are not taken into account, such as upkeep, insurance and taxes.
How does the 1 Percent Rule work?
Purchasing a piece of property for investment requires a thorough analysis of future rents compared to the cost of owning that property. Property owners want to maintain a cash flow greater than costs. For example, an investor is looking to purchase a home valued at $200,000, with the goal of renting the home out for income. After placing 20% down, the investor has a mortgage of $160,000. The one percent rule says that the home would have to be rented out for no less than $1,600 per month ($160,000 * .01).
“I also, feel like (at least in Utah) we are at the peak of the market. Things still could go higher but I feel like I am buying high. So I am hesitant to tie up all my available down payment funds on properties in the peak of the market when, should things stabilize in the near future, it would be better to buy low if it did stabilize.”
It is tough to buy a house for a rental today using the 1 percent rule unless you buy for cash. Take a house at $450,000. You put down 20% leaving you with a mortgage of $360,000. It is tough to rent the house for $3600 per month when the market is really about $2,000 per month. It might be better to purchase the property for cash and rent it for $2,000 per month for a yield of 5%.
Maybe, it is time to be a seller in this economy. If you think prices have gotten whacky and want out now, call us.
We are JT Integrity Properties and we are here to help homeowners out of any kind of distressed situation. As investors, we are in business to make a modest profit on any deal, however we can help homeowners out of just about any situation, no matter what! There are no fees, upfront costs, commissions, or anything else. Just the simple honest truth about your home and how we can help you sell it fast to resolve any situation.
Give us a call today at 260-202-2222 to let us know what YOU need help with!