What is One Percent Rule?

1107 reads · Last updated: December 5, 2024

The one percent rule, sometimes stylized as the "1% rule," is used to determine if the monthly rent earned from a piece of investment property will exceed that property's monthly mortgage payment. The goal of the rule is to ensure that the rent will be greater than or—at worst—equal to the mortgage payment, so the investor at least breaks even on the property.The one percent rule can provide a baseline for establishing the level of rent that commercial property owners charge on real estate space. This rent level can apply to all types of tenants in both residential and commercial real estate properties.Purchasing a piece of property for investment requires a thorough analysis of numerous factors. The one percent rule is just one measurement tool that can help an investor gauge the risk and potential gain that might be achieved by investing in a property.

Definition

The 1% Rule, sometimes referred to as the 'One Percent Rule,' is used to determine whether the monthly rent obtained from an investment property exceeds the property's monthly mortgage payment. The goal of this rule is to ensure that the rent will be greater than or at least equal to the mortgage payment, allowing investors to at least recoup the cost of the investment property.

Origin

The 1% Rule originated in the real estate investment sector as a simple assessment tool to help investors quickly judge the potential profitability of a property investment. Although the exact origin time is unclear, it began to be widely used in real estate investment analysis in the late 20th century.

Categories and Features

The 1% Rule is primarily applied in residential and commercial real estate investments. Its characteristics include simplicity and ease of use, making it suitable for preliminary screening of investment opportunities. The advantage is the quick assessment of the cash flow potential of an investment property, while the disadvantage is that it does not consider other property expenses and changes in market conditions.

Case Studies

Case 1: Suppose an investor purchases a residential property valued at $200,000 with a monthly mortgage payment of $1,500. According to the 1% Rule, the property's monthly rent should be at least $2,000 (1% of $200,000) to ensure the investment's reasonableness. Case 2: A commercial real estate investor buys an office building valued at $500,000 with a monthly mortgage payment of $4,000. According to the 1% Rule, the monthly rent should be at least $5,000 (1% of $500,000) to ensure the investment's feasibility.

Common Issues

Common issues include: Is the 1% Rule applicable to all markets? The answer is no, as rental and property values can vary significantly across different markets. Additionally, the rule does not account for property maintenance, management costs, and market fluctuations.

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