The 1% Rule
This is your cashflow formula. Simply stated, your monthly rental must be at least 1% of the purchase price of the property. As an example, if you paid $150,000 for a triplex in Riverside, you must generate 1% of that amount or $1,500 per month in rental. The reason so many people lost their investment properties in the past was their total disregard of this valuable formula. How could one not lose a property that was generating 0.5% or even lower? Unfortunately, many single family homes in expensive markets do not meet, let alone exceed, the 1% formula, even in today’s market. That’s why 2-4 units provide such an excellent opportunity for smart investors. As an example, all of our 2-4 units in the outskirts of LA, such as Palmdale/Lancaster or Riverside/San Bernardino well exceed the 1% Rule. The triplex example above is an actual property that’s producing over $2,200 in monthly rental. The ROI calculations I have performed in multiple properties indicate anywhere between 6-15% return on your investment depending on the your financing. If you buy all cash, you’ll get around 8.5% ROI whereas a 50% conventional loan would give you a 13% ROI. Here’s the best part; even if you borrowed hard money at 12% at 50% LTV, you would still get 5.5% ROI! All these ROI’s do not include depreciation write offs or future equity buildup.
