THE ONE PERCENT RULE – QUICK MATH FOR POSITIVE CASH FLOW RENTAL PROPERTIES
Investing in rental properties can be a great way to generate passive income and build wealth over time. However, not all rental properties are created equally, and it’s important to carefully evaluate the potential cash flow before making a decision. One quick and easy way to do this is by using the One Percent Rule.
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In this blog post, we will discuss the One Percent Rule and how it can be used to determine if a rental property will generate positive cash flow.
WHAT IS THE ONE PERCENT RULE?
The One Percent Rule is a quick and simple way to determine if a rental property will generate positive cash flow. The rule states that the rental income from a property should be equal to or greater than 1% of the purchase price of the property.
For example, if you purchase a rental property for $100,000, the One Percent Rule states that the monthly rental income from the property should be at least $1,000. This means that if you can find a property that meets these criteria, you can be confident that it will generate positive cash flow.
HOW TO USE THE ONE PERCENT RULE?
To use the One Percent Rule, you first need to determine the purchase price of the property. This includes not only the cost of the property itself, but also any closing costs, repairs, and other expenses associated with the purchase. Once you have the purchase price, you can calculate the monthly rental income by dividing the purchase price by 100.
For example, if you purchase a property for $200,000, the monthly rental income should be at least $2,000. If the property is currently renting for less than this amount, it may not be a good investment according to the One Percent Rule.
FACTORS THAT AFFECT THE ONE PERCENT RULE
It’s important to keep in mind that the One Percent Rule is not a guarantee of positive cash flow. There are many other factors that can affect the cash flow of a rental property, such as property taxes, insurance, and maintenance costs. Additionally, the rule doesn’t take into account the potential appreciation of the property, which could also impact the overall return on investment.
The One Percent Rule also assumes that the property will be fully occupied and the rent will be paid on time. This is not always the case, and vacancy rates can have a significant impact on cash flow. You should also factor in any potential losses from higher-than-expected repairs, unpaid rent, legal fees, and eviction costs.
Another important factor to consider is the location of the property. Properties located in desirable areas with strong rental demand are more likely to generate positive cash flow than properties in less desirable areas. Additionally, properties located in areas with high property taxes and insurance costs may not be as profitable as those located in areas with lower costs.
The One Percent Rule is a useful tool for quickly assessing the potential cash flow of a rental property, but it is not a definitive answer. Other factors such as location, occupancy rate, and expenses should also be considered before making a final decision. Additionally, the rule does not factor in the potential appreciation of the property, which could also impact the overall return on investment.
CONCLUSION
In conclusion, the One Percent Rule is a quick and easy way to determine if a rental property will generate positive cash flow. It is a useful tool but it should not be the only factor in making a decision. It should be used in conjunction with other factors such as location, occupancy rate, expenses, and appreciation potential.
Additionally, it is important to remember that the rule is not a guarantee of positive cash flow, but it can provide a good starting point for evaluating a potential rental property. By carefully evaluating the potential cash flow of a rental property, investors can make more informed decisions and increase their chances of success in the rental property market.
