The Lazy Mentor's Reference Journal
"If you're not embarrassed by your offer, then you offered too much"

 

The One-Percent Rule

Here is my lazy formula for comparing income-producing properties at a glance.  It's called the "one percent rule", which means that a good cash flowing rental will bring in 1% of it's total value each month.  So You simply multiply one month's rent by 100 to arrive at a ballpark value.

For example, if a property will rent for $1000 a month, and tenants pay all utilities, then that property is worth a maximum of $100,000 to me.  ($1000 rent x 100 months = $100,000 value)

That does NOT mean that if you pay $100,000 you can automatically get $1000 in rent.  Some $100k houses will only rent for $750, leaving a negative cash flow.  You need to learn the rental market first.  Know how much rent you can get before making an offer. If it's already rented, this work is done.

The one percent rule is for average neighborhoods.  Here's a looser break down. Subtract any owner paid utilities from rent before calculating.

 

1 - Middle class neighborhoods (white collar professionals) pay 100 to 120 x's monthly rent

2 - Lower Middle class neighborhoods (blue collar / young white collar mix) pay up to 100 x's monthly rent

3 - Low income areas (minimum wagers, move from job to job, some HUD mixed in) 72 x's monthly rent

4 - Slum areas (no one in area has a job, area may have drugs, gangs, guns) 20 to 50 x's monthly rent.

Higher class areas usually have negative cash flow and are harder to rent, especially in bad economic times. I like to concentrate on lower middle class areas.

Of course, this 1% rule is to help you buy smart.  You will find that many sellers and realtors will list properties at 10 times their yearly income.  This makes their "asking price" equal to 120 months of rent vs. our 100 months.  A whopping 20% difference.  But the "asking price' and the actual "selling price" are rarely the same.

Don't be afraid to make a low offer.  All they can do is say no, or come back with a counter-offer.  Remember our motto -- "if you're not embarrassed by your offer, then you offered too much".

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