Source: Yahoo! —
Thinking of investing in real estate? Before buying an investment property, you need to make sure that it will generate at least enough money to cover your monthly carrying costs — and, ideally, more. That’s where the 1 percent rule comes into play. This real estate rule of thumb helps investors determine whether a particular property will be profitable for them, based on its purchase price and monthly rent. Here’s how it works.
What is the 1% rule in real estate?
The 1 percent rule is a real estate investment guideline that lets investors quickly estimate the minimum monthly rent they must charge to break even (at minimum) on a particular property. Specifically, the rule suggests that the rent on an investment property should be equal to or greater than 1 percent of the property’s sale price.
Here’s another way of looking at it: When viewing potential rental properties, investors can use the 1 percent rule to help decide whether the purchase price is worth the income it’s likely to generate.
It’s important to mention that the 1 percent rule is simply a guideline, not a hard-and-fast rule. It doesn’t take into account all the factors that could influence whether or not a potential property is worth the investment at the time. It’s a convenient (albeit imperfect) shortcut to calculate the approximate amount you’ll need to charge in monthly rent in order to make a profit.
How it works and how to calculate it
To calculate monthly rent using the 1 percent rule, simply multiply the home’s purchase price by 1 percent. If repairs are needed, add the repair costs in with the purchase price.
Purchase Price (Including Repair Costs) x 0.01 = Minimum Monthly Rent
For example, let’s say you’re looking at a duplex home listed at $250,000 that’s in good condition and doesn’t need any immediate repairs. Using the 1 percent rule, you’d need to bring in at least $2,500 per month total, or $1,250 per unit, to cover your costs.
Now, let’s say you’re looking at a $150,000 single-family home that needs $25,000 worth of repairs. In that case, you would multiply $175,000 by 1 percent to get a minimum monthly rent of $1,750.
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