Assessing a property’s investment potential requires detailed calculations, but wouldn’t it be nice if there was a quick way to weed out properties that simply won’t make the final cut? This is where the 1% rule becomes useful, and it’s a formula that those looking to branch into real estate investing should become familiar with.
What is the 1% Rule?
The 1% rule is a quick and simplified formula used by real estate investors to assess the potential profitability of a rental property. In short, the 1% rule states that a property should generate monthly rent equal to or greater than 1% of its total acquisition cost.
Monthly Rent ≥ 1% of the Total Acquisition Cost
Here’s a breakdown of how the 1% rule works in the context of multifamily properties.
Say a multifamily property has a total acquisition cost of $500,000. The 1% rule suggests that the property should generate at least $5,000 in monthly rent.
1% × $500,000 = $5,000
If financing the investment, it also means you’ll want a monthly mortgage payment that is less than the 1% calculation (or $5,000 in this example).
Other Important Factors to Consider
Though not a substitute for a comprehensive financial analysis, the 1% rule can be a helpful screening tool for identifying the requisite monthly rent needed for investors to come out ahead each month, but it is just a starting point. There are other variables to keep in mind when assessing an investment’s viability.
- Repair costs – Repairs, upgrades and turnover costs should all be accounted for when running your 1% rule calculation. This is especially true when investing in multi-family properties with value-add opportunities.
- Investment costs – Also keep in mind that the 1% rule does not consider expenses like property taxes, insurance, maintenance or property management fees.
- Local market conditions – Market conditions are a prime determinant of rental rates. In high-demand markets, it might be challenging to find properties that meet the 1% rule.
When considering multi-family properties in Franklin County, Ohio, the 1% rule offers a helpful rule of thumb for determining what you’ll need to earn in monthly rental income, but it is not the only factor to consider when pursuing an investment strategy. There are numerous ways to assess the value and growth potential of multi-family properties in Columbus.
To gain the clearest picture of what to expect when investing in real estate, come talk to us at RL Property Management. Our team manages more than 600 units in the greater Franklin County area. We have the expertise, professionalism, and personal investing experience in the local market to help you get the most out of your strategic investment.
