Rental Real Estate’s 1% Rule (and 50% Rule)
I had a conversation with a friend this past week about him contemplating turning his home into a rental property and it was a reminder that I needed to mention this in the newsletter:
Our friends at BiggerPockets originally introduced us to the “1% Rule.”
This is a rule of thumb that says you ideally want to get at least 1% of the purchase price in **monthly rent **on your rental property.
This means if you bought a $150,000 property, you would ideally want it to earn $1,500 in monthly rent.
Assuming you purchased the property outright in cash, the way to look at this is that 1% monthly gross return would equate to a 12% annual gross return on your investment.
But then the other rule of thumb BP introduced us to is the “50% Rule” which says you should estimate that 50% of that gross income will be eaten up by operating expenses (taxes, insurance, property management, repairs and maintenance, capital expenditures, etc.).
If you lose 50% of your 12% gross return, you’d expect a 6% net return on this rental property.
This of course excludes property appreciation, which, while unpredictable, can be estimated at a few percent per year.
These rules are really useful as back of the envelope reminders on what does and doesn’t make for a good potential rental property and can help you quickly eliminate many properties that only provide a fraction of this return.