Real estate is a capital-intensive venture and as such, it is important to leave no stone unturned when carrying out a transaction. Rollingwood Management in Austin warns that a wrong deal in the real estate business can set you back millions, affecting your credibility as a professional. In order to avoid running at a loss, there are certain rules that serve as guidelines in real estate investing. One of such rules is the 1% rule. This article will break down everything that you need to know about the 1% rule, as well as its application and limitations.
What is the 1% Rule?
The 1% rule in real estate states that the monthly rent of a property should be equal to or be more than 1% of the total investment made to acquire it. While it is not an official rule, it is a guideline that helps real estate investors make a profit on their investment.
While it is not a foolproof metric, there is a better chance of making a profit on a property that meets the 1% rule. When a property does not meet the 1% rule, you are very likely to run at a loss.
How to Calculate The 1% Rule
Calculating the 1% rule is very easy and straightforward. All you have to do is calculate 1% of the cost price of the property. The figure that you get, should be the least that you charge in monthly rent. It is important to note that the cost of repairs should be added to the total cost of the property before calculating the value of 1%.
For example, if the property cost $200,000, applying the 1% rule will give you a result of $20,00. $2,000 should be the least amount that you charge for monthly rent. The rent can be more than $2,000 but never less, if you are going by the 1% rule.
In the case that you carried out repairs in some areas of the home, you must ensure to add the cost before applying the 1% rule. For example, if you carried out repairs worth $10,000 on a house that cost $200,000, your total cost for the house is $210,000. You can then apply the 1% rule on the total cost which will be $2100. Your rent should therefore not be less than $2100. If the monthly rent is below $2100, you are not likely to make profit.
Benefits of the 1% Rule
The 1% rule has two major benefits which are discussed below.
- Easy to Calculate: The 1% rule is very easy to calculate. You can do it quickly without even requiring a calculator. This allows you to make quick decisions on investment, ensuring that you can go through several properties before making a choice.
- Safety: The 1% rule helps you to make safe investment decisions by reducing the risk on properties.
Overall, you should be sure to contact a trusted company, if you are looking for where to buy investment property.