The 1% rule is a strategy used by real estate investors to determine the capitalization rate of a property. It states that when evaluating properties, investors must calculate the monthly rent to be at least 1% of the total purchase price. This rent level can be applied to all types of tenants in residential and commercial real estate. The idea is that if you can comply with the 1% rule, you should be able to cover your monthly expenses and generate positive cash flow from the property.
However, the 1% rule does not take into account the operating expenses of the property that can have a significant impact on returns. That's why, in addition to the 1% rule, investors also use calculations such as the 50% rule and the capitalization rate calculation to estimate operating expenses and potential returns. One of the most challenging things about being a real estate investor is deciding which property to invest in among all the options available. The 2% rule may be a good calculation to use in less expensive markets or for a home that will need a significant amount of repairs in the coming years. The 1% rule is a simple and practical calculation that real estate investors use when analyzing rental properties.
This rule is only used for a quick estimate because it doesn't take into account other costs associated with a property, such as maintenance, insurance, and taxes. The one percent rule is just a measurement tool that can help an investor assess the risk and potential profit that could be achieved by investing in a property. Since other parameters must be taken into account, such as operating expenses, the capitalization rate and long-term appreciation, the 1% rule is not set in stone. If you're evaluating a lot of different properties, using the 1% rule can help you quickly narrow down your list of properties and identify those that might be a good investment. As a general rule, it should be used as an initial pre-selection tool to help you narrow down your list of options. All in all, it's important to remember that while the 1% rule can be a useful tool for quickly assessing potential investments, it's not an exact science.
It's important to do your due diligence and consider all factors before making any decisions about investing in real estate.