This Forbes article posted today mentioned the one percent rule. For those interested in real estate, it’s a pretty damn good evaluation method for investment potential that even a fair amount of intermediate investors have never heard of. We’ll narrow that down to say this is primarily for cash flow properties (not flips) that are residential (not commercial leases)
The One Percent Rule basically says, at a minimum, you should be able to rent out a property at a monthly rate of 1% of your total upfront costs for the property. So if you spend $200k on the property, closing costs, and repairs you need to be able to rent it out for AT LEAST $2k a month. That’s it.
To work backwards: if you know the monthly rent. Multiply it by 100. That will tell you the maximum amount you should spend on buying and fixing up the property.
Monthly Rent x 100 = Max to Pay
Of course, you can always still use fancy spreadsheets and dig into the numbers to find the absolute best values… But here’s the thing, in the investment environment we’re in right now, you’re not going to find many screaming deals. This isn’t like post-2008 everything is a bargain time. So you want to stick with the broad strokes to narrow down areas that might be worth digging in. Use those fancy spreadsheets and calculators later… damn nerd.
OH! the other formula is a bit more conservative, but also works fantastically.
This one works with the Gross Rent Multiplier. For this one, just take the amount of rent that will be paid in one year (annual gross rent) and you never want to pay more than 8 times that amount for an investment property. That includes the cost of purchasing and repairs. The number 8 times the annual rent is what’s called a Gross Rent Multiplier (GRM). All this formula says is that you never want to pay over a gross rent multiplier of 8.
Annual Rent x 8= Max to Pay = Max GRM
You will quickly find, that these 2 formulas won’t work in a lot of the hotter metro areas. You’ll almost never find a deal close to what you would need to pay. That just means you need to look elsewhere or be willing to wait until the property market crashes out.