Will This Property Pencil? :: The 1% Rule

There are a couple of sayings in the real estate investing lingo that are quickly fading into the background. They are:

Will this property pencil?

and

Does it meet the 1% rule?

What do these mean?

Will This Property Pencil?

This is an easy one to explain. Regardless of your criteria, when you put pencil to paper do the numbers work out the way you want them to?

Notice I didn't say did they manipulate the way you wanted them to. Notice also, that the key here is actually sitting down and writing down all the income and expenses to discover the net operating income of the prospective rental property. Then subtract from your NOI (net operating income) the annual debt maintenance (your mortgage payments) and you will have your Cash Flow Before Taxes. (One of the 4 Benefits of real estate investing.)

If he number that you want is there, then the "property pencils."

Does It Meet The 1% Rule?

There is an old axiom in real estate investing that says if a property has the 1% value then there is really no way you can't make money. So what does that mean?

Well, for example let us say that you are buying a rental house and the sales price of the home is $100,000. This rental property generates $1,000 a month in rent. Therefore, the monthly rent is 1% of the home's value.

If you are a California or Florida or New York, or Washington, DC real estate investor, how has that formula been working for you lately? (Please don't use obscenities here. I'm just asking.) Even here in the Kansas City residential investment property market there are very few places with rents that are 1% of the value. .9% and .8% yes. But not 1.0%. Not in neighborhoods with great potential for appreciation, anyway.

If you are investing in real estate on either coast I know that you are at about .5%, .4% or even a pathetic .4% of values. What if I could tell you about a market where the 1% rule still works much of the time? A market that had 7% appreciation last year. Remember, I asked you not to use obscene language earlier if you reside on either coast.

This market is close to Kansas City. I am intimately familiar with it. And I'm about to open it up to my clients. I'll keep you posted.