I'm not sure the 1% rule for rentals makes any sense.
If you aren't familiar with it, the 1% rule for rentals says simply that your rent for a rental property investment should be 1% or more of the purchase price. So for example if the property costs $100,000 then you'd want a monthly rent of $1000 or more to pass this rule.
I have a few problems with the rule. Mostly its applied too broadly and the exact costs differ too much for the 1% rule to really be useful. I also don't know the origins or logic of the rule so I don't know how we could modify it to individual situations or to evolve over the years.
First big flaw I think the 1% rule has is that it is applied equally across the nation even though situations vary a lot. For example, the property taxes and insurance rates are going to vary across the country but this is never accounted for in the 1% rule. Here's an example of a couple houses to illustrate :
Texas :
Price $100,000
Rent : $1200
Tax : $2400
Insurance : ~$600
Tax and insurance = $3200 or 3.2%
Northwest :
Price : $100,000
Rent: $900
Tax : $1200
Insurance : ~$300
Tax and insurance = $1500 or 1.5%
The taxes and insurance alone are a $1700 annual difference or 1.7% of the purchase price.
I estimated the insurance rate for that Texas house. But I think thats a fairly good guess.
Interest rates in 1980 were around 10%. Today they are around 4%. (see history of mortgage rates) If you finance the property with 25% down and a $75,000 loan then you would have been paying $7500 a year in interest in the 80's and only $4000 a year now. Thats a $3500 annual difference in interest you'd be paying from then to now. Thats pretty huge.
Second, the 1% rule has been around for decades but hasn't evolved with the changes in the interest rate environment. Interest used to be a lot higher in the past than it is today. If it made sense to buy a house as a rental under the 1% rule in the 80's when interest was higher then it should make more sense to buy such a house today.
A house in Texas in the 80's could have had $7500 in interest costs and $3000 in tax and insurance costs for $10,500 total costs. You'd almost have to hit the 1% rule then just to over your basic carrying costs. You'd be a "success" with the 1% rule if you took a mere $1500 net a year. If the house above with its $1200 rent was bought in the 80's then its net would be just $3900 after interest, tax and insurance.
Buying today in the Northwest by comparison you'd have $1500 in tax and insurance and just $3500 in interest and that $900 in rent would give you $10,800 gross for a net $5,800. Yet this Northwest house at 0.9% rent / purchase is a failure.
If you combine the difference in interest, tax and insurance and buy in different locations in the 80's versus now then you could get :
Northwest house today : Rent is 0.9% and nets $5800
Texas house in the 80's : Rent is 1.2% and nets $3900
Third thing the 1% rule fails at is accounting for any other costs. What if your rental has a HOA fee and it requires you to pay the water, garbage and heat? Where does that money come in versus a property with no HOA where the tenant pays all utilities? I have a single family home where I pay no utilities so those costs for me are $0. My dad has a four plex where he has to pay water, garbage and (until recently) he had to pay the heat and its not in a warm region. My dads bills for utilities would have been running easily $300-400 a month for that property or $75-100 per tenant. My dad changed the heat setup a few years ago so he no longer pays those utilities. But the 1% rule would treat these properties the same and doesn't consider the different utility costs.
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