When it comes to real estate investing, the 1% rule isn’t the only method to determine the best opportunities to buy a rental house. Other popular methods include the gross rent multiplier, the 70% rule and the 2% rule.
Gross Rent Multiplier
The gross rent multiplier (GRM) gauges the amount of time it takes to pay off an investment. It’s a property’s purchase price divided by its gross annual rent. The result is the total number of years it’ll take to pay off the investment only with rental income. The lower the GRM, the more lucrative the property may be.
Purchase price ∕ Gross annual rent = Years to pay off investment
Let’s say you purchase a $200,000 investment property. You charge $2,500 in monthly rent, and your annual gross rental income is $30,000 (2,500 ✕ 12).
The property’s GRM is 6.67. So, it should take about 6 years and 7 months to pay off the property with rental income. Of course, you’ll need to consider other expenses when determining a property’s profit potential, including repair, operating and maintenance costs and vacancy rate.
You can use GRM to compare investment properties, too. If one property has a GRM of 6.67 while another has a GRM of 8.33, the property with the lower GRM (6.67) may be the better option because you should be able to pay off the investment faster. When comparing properties, make sure they’re in similar markets with similar operating, maintenance and other costs.
70% Rule
The 70% rule is for house flippers. It recommends that an investor pay no more than 70% of a home’s after-repair value (ARV) minus repair costs.
To calculate the 70% rule, multiply the home’s estimated ARV by 0.7 (70%). Take the result and subtract any estimated repair costs. The final result will be the amount you should pay for the property. Let’s look at an example.
Let’s say you’re interested in a property you estimate will have an ARV of $150,000. You also estimate you’ll need to spend about $30,000 on repairs to flip the home.
Here’s how to apply the 2% rule on a property selling for $150,000:
$150,000 ✕ 0.02 = $3,000
According to the 2% rule, your monthly mortgage payment shouldn’t exceed $3,000, and you should charge $3,000 in monthly rent.
The 2% rule is more extreme than the 1% rule – basically doubling the monthly rent amount. But it can work in certain markets and provide a financial safety net if an investor struggles to fill vacancies or needs a major, costly repair on the property.
No matter which rule you choose, you can run the numbers on a potential property to help ensure you’re making an affordable investment.
For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price. If you want to buy an investment property, the 1% rule can be a helpful tool for finding the right property to achieve your investment goals.
The 1% rule is a guideline real estate investors use to choose viable investment options for their portfolios. Although the rule has helped many investors make wise decisions regarding their investment properties, the current real estate market may make following the 1% rule unrealistic.
Multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent. Ideally, an investor should seek a mortgage loan with monthly payments of less than the 1% figure.
For example, if you purchase a house for $150,000, multiply that number by 1% (. 01 in your calculator) to get $1500. That means you'll want to charge at least $1500 in rent per month to cover your investment.
The 1% rule used to be a pretty good first metric to determine whether a property would likely make a good investment. With currently inflated home prices, the 1% rule no longer applies.
In November, Corcoran appeared on the BiggerPockets Real Estate Podcast with her son Tom Higgins to describe two methods she says make up her “golden rule” of real estate investing: putting down 20% on an investment property and having tenants of that property paying for the mortgage.
If you're interested in residential real estate investing, you may have heard of the BRRRR method. The acronym stands for Buy, Rehab, Rent, Refinance, Repeat. Similar to house-flipping, this investment strategy focuses on purchasing properties that are not in good shape and fixing them up.
It's the idea that 80% of outcomes are driven from 20% of the input or effort in any given situation. What does this mean for a real estate professional? Making more money in real estate is directly tied to focusing your personal energy on the most high value areas of your business.
You keep track of amount paid for mortgage, improvements, and anything that increases the value of the house. If/when you sell, you total the amount you put in for the down payment and the other tracked expenditures, then divide by the total both parties put in.
The 1% rule states that a rental property's income should be at least 1% of the purchase price. For example, if a rental property is purchased for $200,000, the monthly rental income should be at least $2,000.
All the one-percent rule says is that a property should rent for one-percent or more of its total upfront cost. For example: A property that costs $100,000 should rent for at least $1,000 per month. A property that costs $200,000 should rent for at least $2,000 per month.
It is generally recommended to aim for an ROI of 10-15%. However, the ROI that is considered “good” or “bad” is dependent on an individual's financial standing and the particular property they choose to invest in.
It's not an accurate metric of a potential investment's performance. Think of any “percent rule” as a guideline for further exploration. It's important to note that while real estate investing has many significant advantages for building passive income, cash flow is key to your success.
Greatest-Possible-Estate Rule The interpretive rule that a deed or lease transfers the greatest possible interest to the grantee and reserves only that which it expressly reserves.
The 70% rule helps home flippers determine the maximum price they should pay for an investment property. Basically, they should spend no more than 70% of the home's after-repair value minus the costs of renovating the property.
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