How to Use the 1 Percent Rule to Make Better Investments

You may be new to the world of real estate investing, or you may have years of experience under your belt. During your development as a real estate investor, you may have read about or heard in passing the phrase “the 1% rule.”

You may have heard it, but you may not fully understand it. What is the 1% rule, and how does the 1% rule influence the investments you make in real estate? Let’s use this post to break down the 1% rule, how to use it, and in what ways it will help you make better investments.

What is the 1% rule in real estate?

Investors use the 1% rule to evaluate how much passive rental income is earnable from their chosen properties. The 1% rule allows investors to calculate what rent to charge their tenants to increase net operating income (NOI) after operating expenses.

When using the 1% rule, ensure that the money you acquire from rental payments will either exceed or equal the monthly mortgage payment you make on your invested property. Using the 1% rule, you adopt a fiscally prudent investment strategy to increase your monthly dividends and help you lay the foundation for generational wealth.

How to calculate the 1% rule

The formula for the 1% rule is simple to calculate. Take the list price of the available property and add together all the repairs or upgrades you identified on a walkthrough. Once you have the total, multiply that amount by 1% to get the base level for the monthly rent you need to charge.

The 1% rule helps you calculate whether a particular property is worth the investment. If the numbers don’t add up, use that rudimentary formula as a sign that it’s best to move on and find a more feasible property to invest in.

What are the benefits of the 1% rule?

As the formula shows, you can calculate the baseline you must charge for rent to your tenants to cover your operating expenses. But that’s not the only benefit.

Forecast if your proposed rental income is feasible

When setting your rent prices, align your building’s rent with current market values. If your rent prices are hundreds or thousands of dollars above what similar landlords in the community charge, you’ll struggle to find tenants who can fill those open vacancies. Additionally, you may cause long-standing tenants to move out, increasing your tenant turnover rate.

Using the 1% rule, you already know how much rental income you need to generate to break even on your investment. If the numbers force you to consider rental prices well above market average, that’s all the evidence you need to let that deal go.

Determine how to boost rental income above your baseline

The 1% rule doesn’t just help you weed out properties lacking promising returns on your initial investment. Once you have your baseline, you can calculate other mitigating factors that will help justify rental prices slightly above market averages.

For example, suppose you found a building for sale located near mass public transit. Proximity to public transit lines is considered more valuable to would-be tenants. People are willing to pay a little more in rent if it affords them the convenience of easy access to public transit.

Once you have your rental baseline, calculate how much you can add a transit-oriented fee to your rental price. How much will that increase your monthly rental income earnings? Conversely, will that slightly higher rent price turn off too many prospective tenants? Answers to each of those questions will help guide your investment decision-making process.

Compare the 1% rule with your projected CAP rate

Another trick of the investment trade is to compare various calculations that will inform your investment decision-making. The 1% rule helps you establish a baseline for rental income to justify your investment. But you can also compare the 1% rule with your projected CAP rate to get a realistic sense of what your listed property could be worth.

The CAP rate is another tool to measure risk when considering a new property investment. Like the 1% rule, calculating your CAP rate is a simple formula.

During the discovery phase, you’ll get access to the current property owner’s books. Look for the annual net operating income and divide that income by the property’s current market value. Your CAP rate roughly estimates how much annual operating cash flow you can expect to earn by purchasing that property.

If the numbers paint a clear and lucrative picture, you should invest. If not, let the calculations serve as conclusive evidence that you should find other properties to invest in.

Learn how to make smart investments by enrolling in a real estate education community

The 1% rule, CAP rates, and other simple calculations will help you analyze investment opportunities using real dollar figures. Build an investment strategy using numbers, and you’re far and away ahead of other investors just beginning their journeys into real estate.

To learn more about how to make each of these numerical calculations work in your favour, consider joining the fastest-growing real estate education community in the country. WealthGenius supports over 850 real estate investors, along with hundreds of millions in lucrative investment opportunities.

As a member of the community, you can receive direct coaching and mentorship from experienced investment professionals. You can also swap stories with newer investors and learn from each other’s early successes and setbacks.

 

Don’t miss out on a chance to make smarter investment decisions. Join the WealthGenius community today and transform your dreams for success into unparalleled reality!