The One Percent Rule for Investment Property Financing
Analyzing Your Next Investment Property
The conditions of the market to consider purchasing an investment property, namely, single-family homes. First, there is a large supply of homes available across the country. Second, interest rates on mortgages of movables and investment rates are very favorable. And finally, there are many people who have lost their homes and need a place to live. The recent housing bust has created an increased supply and increased demand in the market for rental properties.
There are many things to consider when buying a rental property. Is this the right place? Do I have to make repairs? How I can rent the property? Who will manage the tenants? Will I have a cash flow in this property? I can? Obtain favorable financing? And so on and so forth. There are many advantages to owning rental properties, ie the cash flow and tax benefits. Perhaps the most important factor is the financial side of real estate investments. After all, it is a business and businesses are designed to make money.
The Rule
When researching potential rental properties, it is a quick way to determine the financial potential of an investment property, the percentage rule One ,One percent applies if the financing of the purchase of the property you are interested in cash flow generation. (Why did not want to charge you some people and companies have so much money that they want the tax benefit to investment real estate offer.) This rule is simple: the monthly rent should be higher than expected or equal to one percent of mortgage amount. The calculation of back-of-the-napkin looks like this:
Scheduled Monthly Rent / Mortgage Total> = 1%
or (simply)
Rent expected> = 1% x Amount of mortgage
The advantage of this rule is:
1 - The simplicity of the calculation, for rapid assessment.
2- All you need to know is the monthly rent for your target market.
3- This allows to calculate a bid price of the investment property or otherwise how to rent your property
or (simply)
Rent expected> = 1% x Amount of mortgage
The advantage of this rule is:
1 - The simplicity of the calculation, for rapid assessment.
2- All you need to know is the monthly rent for your target market.
3- This allows to calculate a bid price of the investment property or otherwise how to rent your property
The Assumption
The only case of this rule is that the investment loan is a fixed rate mortgage to 30 years. That's it. Now back to the towel.
Other Considerations
Usually there are exceptions to the rule worthy (otherwise it would be a law). In this situation, there are exceptions and considerations. Things to consider when using this rule:
- Interest rate mortgages
- Home owners association fees
- Property taxes and home owners insurance
- Maintenance contract rates (i.e. weekly lawn mowing)
- Property Management Fees
For Example
2 bedroom, 1 bath single family home is listed at $ 100,000 (for the sake of simple calculations). Currently, my lenders require 20% down on mortgages investment properties. Therefore, the loan amount would be $ 80,000. Therefore, applying the rule of one percent 1% of $ 80,000, the monthly rent expected to be $ 800. In other words, would have to rent this house for $ 800 a month to have a positive cash flow. After researching your market that is expected for this type of rental, we can determine the financial solvency of the investment property. In some cases, you can make money with less than 1% of the mortgage amount. However, for simplicity, when you are looking for real estate investment, the 1% rule will give a quick and dirty the place where the property is understanding.
And Finally...
If you need to finance your real estate investment, the one per cent rule can help you in your evaluation. Remember, the weakest method of risk purchase of the entire property is 100% down plan. The higher risk and a higher return on investment (ROI) is the 0% down regime.
I used this rule with two family houses I own. It worked very well to provide a cash flow and a cushion for unforeseen maintenance costs. Currently I'm in the market for another investment property and this rule has served me well in my evaluations. Of course, depending on your market, it takes more time to find the right property, but the long term benefits are worth it.
I used this rule with two family houses I own. It worked very well to provide a cash flow and a cushion for unforeseen maintenance costs. Currently I'm in the market for another investment property and this rule has served me well in my evaluations. Of course, depending on your market, it takes more time to find the right property, but the long term benefits are worth it.
