The Rules of Thumb for Landlording

This is going to be a short post today for a short concept, The 1% Rule of Thumb.

The 1% Rule of Thumb was invented by real estate investors to sift through piles of houses. This rule of thumb will quickly determine if the deal is good enough to make you some money (cash flow) or at least break even.

Keep this in mind: all markets are different. In my market, 1% of the appraisal value for Houston is good for rent. Some markets can get up to 2% of appraisal value in rent. You won’t see that happening in Houston.. because its cheaper to own than rent in Houston!

Do not confuse appraisal value with purchase price/repairs!

 Lets break this deal down real fast:

  • Purchase Price: $65,000
  • Repairs: $32,000
  • Total all in: $94,000

The 1% rule of thumb on the “total all in” cost would be $940 per month in rent. I could get that easily. I would probably have too many applications to even review for that house. I wouldn’t cash flow much at all, but I could get that in rent.

Now I bought the house for $65,000 and put $32,000 in. We’ve found that were $94,000 all in. But here is the kicker..

The house appraised for $137,000.

1% of appraisal value – $137,000 = $1,370 per month in rent.

So now we know the difference between the 1% rule of thumb on appraisal value / purchase price.. but what about a rule of thumb for PITI?

Estimate 50% of your collected rents will go towards PITI, vacancy, property management, and maintenance. So really, you should profit 50% of what you collect in rent per month.

So a quick snapshot on landlord rules of thumb:

Appraisal value: $137,000 x 1% = $1,370 per month

50% rule = $685 cash flow per month.

Although it’s not going to be like that every month, I’d say it’s within $15 of what is actually performing on that property for me.

If you can learn these basic rules of thumb, your life as a real estate investor will be much easier.

Merry Christmas!