When it comes to real estate investing, the 1% rule isn’t the only method to determine the best opportunities to buy a rental house. Other popular methods include the gross rent multiplier, the 70% rule and the 2% rule.
Gross Rent Multiplier
The gross rent multiplier (GRM) gauges the amount of time it takes to pay off an investment. It’s a property’s purchase price divided by its gross annual rent. The result is the total number of years it’ll take to pay off the investment only with rental income. The lower the GRM, the more lucrative the property may be.
Purchase price ∕ Gross annual rent = Years to pay off investment
Let’s say you purchase a $200,000 investment property. You charge $2,500 in monthly rent, and your annual gross rental income is $30,000 (2,500 ✕ 12).
The property’s GRM is 6.67. So, it should take about 6 years and 7 months to pay off the property with rental income. Of course, you’ll need to consider other expenses when determining a property’s profit potential, including repair, operating and maintenance costs and vacancy rate.
You can use GRM to compare investment properties, too. If one property has a GRM of 6.67 while another has a GRM of 8.33, the property with the lower GRM (6.67) may be the better option because you should be able to pay off the investment faster. When comparing properties, make sure they’re in similar markets with similar operating, maintenance and other costs.
70% Rule
The 70% rule is for house flippers. It recommends that an investor pay no more than 70% of a home’s after-repair value (ARV) minus repair costs.
To calculate the 70% rule, multiply the home’s estimated ARV by 0.7 (70%). Take the result and subtract any estimated repair costs. The final result will be the amount you should pay for the property. Let’s look at an example.
Let’s say you’re interested in a property you estimate will have an ARV of $150,000. You also estimate you’ll need to spend about $30,000 on repairs to flip the home.
Here’s how to apply the 2% rule on a property selling for $150,000:
$150,000 ✕ 0.02 = $3,000
According to the 2% rule, your monthly mortgage payment shouldn’t exceed $3,000, and you should charge $3,000 in monthly rent.
The 2% rule is more extreme than the 1% rule – basically doubling the monthly rent amount. But it can work in certain markets and provide a financial safety net if an investor struggles to fill vacancies or needs a major, costly repair on the property.
No matter which rule you choose, you can run the numbers on a potential property to help ensure you’re making an affordable investment.
How the One Percent Rule Works. This simple calculation multiplies the purchase price of the property plus any necessary repairs by 1%. The result is a base level of monthly rent. It's also compared to the potential monthly mortgage payment to give the owner a better understanding of the property's monthly cash flow.
The 1% rule states that a rental property's income should be at least 1% of the property's purchase price. For example, if a rental property is purchased for $200,000, the monthly rental income should be at least $2,000.
Is The 1% Rule Realistic? Many people find the 1% rule helpful, but there are some shortcomings with using this strategy. For one thing, properties that fail to meet the 1% rule are not necessarily bad investments. And likewise, properties that do meet the 1% rule are not automatically good investments either.
The 1% rule used to be a pretty good first metric to determine whether a property would likely make a good investment. With currently inflated home prices, the 1% rule no longer applies.
This rule outlines the ideal financial outcomes for a rental property. It suggests that for every rental property, investors should aim for a minimum of 4 properties to achieve financial stability, 3 of those properties should be debt-free, generating consistent income.
In case you haven't heard of the so-called Golden Rule in house flipping, the 70% Rule states that your offer on a property should be no greater than 70% of the After Repair Value (ARV) minus the estimated repairs.
To apply the 1% rule, you can either multiply the property's purchase price by 1% or move the decimal point in the purchase price two places to the left. The result should be the minimum you consider charging in monthly rent.
The 1% rule is simply a filtering tool. You look for properties that appear to meet the 1% rule. If they don't, you discard them and move on to the next. IF they do, then you investigate further.
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
What is BRRRR, and what does it stand for? Letter by letter, BRRRR stands for “Buy, rehab, rent, refinance and repeat.” It's like flipping, but instead of selling the property after renovation, you rent it out with an eye on long-term appreciation.
Generally, a good ROI for rental property is considered to be around 8 to 12% or higher. However, many investors aim for even higher returns. It's important to remember that ROI isn't the only factor to consider while evaluating the profitability of a rental property investment.
Simply divide the median house price by the median annual rent to generate a ratio. As a general rule of thumb, consumers should consider buying when the ratio is under 15 and rent when it is above 20.
How Long Does It Take to Make a Profit on an Income Property? If you know all of your costs and the rent that you're charging exceeds those, you'll start making a profit right away. That assumes that your tenants pay their rent on time each month.
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
As part of its REALTOR safety program, NAR trains its REALTORS to practice the “10-Second Rule.” It says one of the reasons REALTORS and agents end up in dangerous situations is because they are not paying attention. To counteract, they should take 10 seconds to observe and analyze their surroundings.
Roger shared his 10/90 rule, balancing risk by investing 10% in higher-risk projects and 90% in stable, cash-flowing properties. This strategy helps navigate economic cycles and maintain a steady income stream.
The one-action rule states "There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property." (Cal. Code Civ. Proc. § 726(a)).
For example, if a rental property is generating an annual NOI of $6,500 and the annual mortgage payment is $4,700 (principal and interest), the debt service coverage ratio would be: DSCR = NOI / Debt Service. $6,500 NOI / $4,700 Debt Service = 1.38.
Address: Apt. 536 6162 Reichel Greens, Port Zackaryside, CT 22682-9804
Phone: +9958384818317
Job: IT Representative
Hobby: Scrapbooking, Hiking, Hunting, Kite flying, Blacksmithing, Video gaming, Foraging
Introduction: My name is Jamar Nader, I am a fine, shiny, colorful, bright, nice, perfect, curious person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
