REI: Key to Cash Flow, The 1% Rule
Make Monthly Cash Flow Using 1% Rule
There is a reason why Real Estate has created more millionaires than any other type of investment vehicle, it works.
The 1 percent rule is an analysis tool used by real estate investors to quickly scan through deals. It refers to the idea that the monthly rent of the property must equal 1 percent of the of the properties purchase price.
- 100,000 Purchase = 1,000 Monthly Rent
- 250,000 Purchase = 2,500 Monthly Rent
- 300,000 Purchase= 3,000 Monthly Rent
- And so on $$$
Being such a powerful tool this is something you must learn in order to identify deals! If you are looking to learn how to identify deals for buy and hold property to cash flow, you’ve come to just the right place.
Check out this property I identified as a great cash flow property!
Good deals are hard to come by these days, especially with the amount of competition out there. I live in a town, about 15 minutes south of San Jose, called Morgan Hill, its crazy expensive and barrier to entry is extremely high. With that said, I look outside of my own local market to locate deals that would cash flow.
You need to research as much as you can and extensively use all of your resources to find deals. With that said, let’s dive into these number and see why this a great deal!
Here are the numbers I pulled off Redfin:
The Numbers Broken Down
- Property Purchase Price: 230,000 (Original Listing Price: 215,000)
- Rental Income: 1150 x 2 Units= 2300
- 1% Rule : 2,300/ 230,000 = 0.01%
Now that we have identified the monthly rents to fit the 1% rule, lets plug in all of our other factors into my favorite Rental Property Calculator.
The only factors in the calculator that we need to find would be the property tax rate, which you can find on the counties website, and the insurance for the property, which you can use Redfin as an estimation when you are looking at expenses.
Side Note: On a historical basis, market rents increase at about 2%-3% every year.
Cha-ching! Check it out.
Our total cash investment on the property is $50,000. This is our down payment of 20% (46,000) and our closing costs (4,000).
Taking into account all of our expenses, here we are looking at a monthly cash flow of (drum roll) … $852! But Wait! That’s not all!
Don’t forget about equity! Every month that mortgage is paid, you also accumulate equity, which mean that your total amount owed on the principal goes down.
After 5 Years
You will have made:
- Your cash back and more: $57,746 (BOOM!)
- Total Equity in Property: $98,902, $46,000 was your down payment, so the amount accumulated is $52,902, which is great.
The longer you hold this type of investment, the more money you will make.
As you can see Real Estate Investing (REI) is an extremely powerful tool, especially when combined with the 1% Rule. Remember that when looking for a deal that fits the rule, you will look through hundreds, if not thousands of properties to find one. DO NOT get frustrated and give up, instead, set email alerts for Redfin, Zillow, etc. Network with other investors by going to MeetUp meetings, or join your local REI Club.
I hope everyone enjoyed this information and was able to add the 1% rule to their arsenal. If you liked it, check out my article on House-Hacking to see how you can almost live for free!!
Another side note: (This is a killer deal and one I tried to buy but was picked up by a cash buyer! )