Morris Invest: What is the 1% Rule for Real Estate Investing?

Morris Invest: What is the 1% Rule for Real Estate Investing?


How to understand the 1% rule
for real estate investing, and what does that mean for your
passive income every month– that’s today’s show. Let’s get to it. Hey everyone, I’m
Clayton Morris. Welcome to the Investing
in Real Estate show. This is the show where we focus
on building passive income. And how we do that is with
buy and hold real estate. We find great real
estate that’s going to give us an enormous
return on investment year after year after year. And the idea is that we hold
it for the rest of our lives. That’s what we focus on
this channel specifically. So if you’re looking for
other real estate talk, if you want to learn about
mobile home investing and giant commercial properties and
investing in REITs, R-E-I-Ts, and all that other
kind of stuff, or if you’re interested
in flipping houses, that’s not what you’re
going to find here. We want to hold
on to real estate in order to create
great cash flow and increase our net worth
for the rest of our lives. Today I want to talk
about a strategy that– I know it’s something
that my father-in-law uses to great effect. And a lot of real
estate investors use this as the
standard by which they invest in real estate. And that is the 1% rule. So I want to dive
into this today and help you understand a little
bit about what this exactly means and what the 1% rule is. Now, let me preface this by
saying that you should never use this as the entire metric
for your investing strategy. So what I mean by that
is, yes, it’s a good way to kick-start an idea, and look
at, and say to yourself, OK, that sounds like it’s
going to be a good deal. Let me dive deeper. So you only want
to really use this as a jumping-off point
in which to figure out your real
estate-investing journey. You don’t want to just
say, yep, that’s it, I’ll buy that property,
sold, after you understand the 1% rule. Again, it’s just a
jumping-off place. So let’s dive into it. What exactly is the 1% rule? Well, at the basic
level, it just means that when you purchase a
rental property or you purchase a piece of real
estate, that it should cash flow, every
month, 1%, up to 1% of the purchase price
of that property. Now, in round numbers,
let’s make it super simple. So let’s take, for
instance, $100,000 property. When you look at a
$100,000 property– that’s the purchase price– what are you going to get? Get out your handy
little calculator. Can anyone help me with
the math real quick? Ding, ding, ding. It’s going to be $1,000 a month. So the 1% rule on a
property of $100,000 in cost is $1,000 a month. That’s what it needs to
cash flow in order for you to basically break even and make
sure that your investment isn’t a bust. Now, I know that many people use
this to decide whether or not they’re going to
invest in real estate. You may use this
as your baseline metric deciding whether or
not a deal is good or not. I’d like to go a little
higher than that, but that’s because I’m
going after cash flow. But for a lot of
investors, 1% is exactly where they want to be. I’ve heard it on podcasts. I’ve seen it from real estate
experts who I’ve witnessed– I’ve been sitting in the
audience, listening to them. And these are
millionaires who own lots of properties around the world. They follow the 1%
rule to make sure that their property is going
to cash flow 1% of the purchase price of that property. So you can use that
in your arsenal when you’re deciding
whether or not to buy a rental property, the 1% rule. Now, in terms of
feasibility, this is my process when analyzing
a set of properties. What you want to look at,
though, is not just the 1%. So if it doesn’t
meet that 1% rule, then I’m not going to buy it. I’m going to walk away. Now, a lot of investors
I speak to– you own a rental property that
maybe you had in the family, you lived in that
property and then you move to another
property and you kept it. I’m sure there’s probably a
lot of you listening right now, raising your hand,
saying, yep, that’s me. I have this townhouse
that my wife and I had as our first property, and
we moved, and we kept it. And I’ll ask them, what is
the return on investment? And very often, they
can’t answer that. Well, is it even
hitting the 1% rule? You bought it for $100,000
or you bought it for $80,000. It’s paid off. Great. And it’s only cash flowing maybe
$100 above what you owe on it. You have to take in your
expenses and your taxes and all of the other
things that you’re paying. Don’t forget to
include your home– your Homeowners’ Association. So if you’ve got a
townhome or a condo, your HOA is going to
eat into that 1% rule. That’s why I mean, again, the
1% is just a jumping-off point. When you want to take
it a step further and start to analyze
that property and really get into
the nitty-gritty, we need to look at taxes,
we need to look at the HOA, we need to look at your
insurance costs as well and your property
management costs. So all of those things need to
be figured out before you just raise your hand and say, yep,
I want to keep that property. So if it does meet
that 1% rule– so when you’re quickly
analyzing a property, if it does meet that 1% rule, great. Then move on from there and run
the numbers on the property. I want you to start to check out
what that cash flow will look like once you start to add
in things like insurance and property taxes
and things like that. So again, the 1% rule can be
a really valuable mechanism to help you figure out, just
as a back-of-the-envelope quick calculation, is this property
going to work for me? I’m telling you,
though, if it doesn’t– if, for instance, on
that $100,000 property, it’s only going to cash flow
$800 a month, walk away. Run for the hills. Because guess what? When we start adding
in taxes, when we start adding in other
factors, repairs, property management, who knows what
else you’re going to be adding into that property,
then it’s going to start to dwindle it down
to $0, next to nothing. At least with a 1% buffer,
you know that you’re probably going to be coming out on top. And then you can analyze
the deal from there. Some investors like
to go up to 2%. Now, if you go up
to 2%, chances are you’re going to have a lot of
other things to experience. You’re going to have a lot
of other things to fix up. Now, typically it’s
going to be on properties that are a little bit less
expensive, like the ones that I like to buy. So you get properties
in the $40,000, $50,000 range, well, yes you’re
going to probably have to put $20,000 into them. And that’s what I do. So $15,000, $20,000 of fixing
up, and then the total cost is $50,000, $45,000. So I might acquire the
property for $25,000. And then I’ve got to put
$20,000, $25,000 into it. So OK, great. Now can I hit the 2% rule,
meaning will the monthly rent be about 2% of the purchase
price of the property? And then you move into those
higher territory numbers. These are incredibly
difficult to find, these types of
properties, and you’ve got to have a lot of
smart pieces in place in order to make a
2% rule work for you. We try to do that on
every property that I do, but it’s incredibly
difficult. And by the way, these properties are very
hard to find, especially in the good neighborhoods
where you’re going to have stable
tenants, good job growth, and you’re not going to
have any headaches to worry about, you’re not buying
them in a war zone, right? I had somebody email
me the other day and say, hey, I found
a $3,000 property. He was on some college
campus somewhere. I don’t know what state. And he just wanted some advice. And I said, well, I need some
more details than that, right? If it’s $3,000 and
it’s been sitting there on the market for a long time
and it’s been publicly seen by people, chances are that
thing should just be torn down. I mean, $3,000, what are
you paying for, really? Probably just the value
of the land at that point. So yeah, that may sound
like a great deal, but then when you realize
you’ve got to put $50,000 into the house because all it
is is a bombed-out fire shell of a house– I mean, there are houses
in New Jersey near my house that I’ve seen that
are literally shells. They’re shells. They’ve burned inside, and
it’s like a candy shell. You might as well just
knock the whole thing down, because it’s worthless. So when you’re looking
at those numbers, yes, you can find 2% properties. They’re very hard to find,
and they require a lot of work and they require
a lot of education in order to make them get
you that type of cash flow. So if you’re at 1%, good. If you can be at a 1.5%, great. 2%, yes, that’s great. But you really have to take into
consideration a lot of factors. Again, these are
just rules of thumb. These are good
jumping-off places. And it’s a good way for you to
quickly do a quick analysis. When someone throws you
a property and says, hey, I’ve got a property for
$150,000, it cash flows $1,000. I’m going to throw that
out to you right now. Is that a good one? Here’s the property. You’re going to buy
it for $150,000. It’s going to cash
flow $1,000 a month. Ding, ding, ding, ding. No. I’d walk away from
that in a heartbeat. $150,000 house that’s only
going to cash flow $1,000? No, thank you. I’d rather buy three properties
that are going to cash flow $700, $800 a month,
and I’ll nearly triple that amount of cash flow. So again, just a quick
back-of-the-book analysis, then it enables you to dive in
a little bit more deeply and do some deeper research
about the cash flow, about the history
of the property, the Homeowners’ Association
if there is one. You know my feelings on
Homeowners’ Associations. I’ve got a whole series on why I
don’t like condos and townhomes and those types
of things, because those special assessments
by the Condo Association can come out of the blue and
charge you an additional $2,000 to fix the roof on the whole
complex, which happened to me. So I’m not a big fan of those. But again, that is the 1% rule. It’s a tool that a lot of
investors use to great effect in order to buy a
rental property. I know my father-in-law did it. And when he found out that he
could get great deals at 1% or above, he was able to jump on
those deals and invest quickly. It’s a tool in your
arsenal in order to help you invest in
rental properties quickly. I hope you found this useful. These are things that we
don’t learn right away when we’re investing in real estate. But once you understand
the things like 1% rule, then it’s always something
you can keep in your pocket, in your purse, in your
wallet, that you can pull out in a moment’s notice in
order to analyze a deal and then take it from there. I hope you found this helpful. I know I found this helpful
when I was first starting in real estate investing. If you have any
questions, I would love to hear your thoughts. If you’re watching
this on video, please leave some
comments in the thread below and ask any questions. We always respond. I try to respond very,
very quickly to questions. And thank you so much for
subscribing and leaving all of your kind reviews as well. I really, really appreciate it. We publish this show multiple
times per week, everyone. We really try to help you go
out there, become a real estate investor. We really want
you to take action and to build legacy wealth
for you and your family. We want you to have all the
tools here in order to do that. Much love to you all. We’ll see you next time here
on the Investing in Real Estate show. Bye, everyone.

100 thoughts on “Morris Invest: What is the 1% Rule for Real Estate Investing?

  1. Hi Clayton, I have a property in San Jose CA that I bought for $300k in 2009 and is now about $700k. Equity = $300k+. PITI = 1900/month. Rent = 3250/month. Net cash flow is about $1k/month. Am I better off selling, taking equity to use to buy multiple cheaper properties? what would you do?

  2. I use to think 1% rule was great with real estate until I started getting into crptocurreny….If I invest $100,000 in real estate, I only get $1,000 cashflow…that is considered horrible in crypto currency. In cyptocurrency if I invest $100,000, I expect at least $9,000/month from some platforms, and that is very very very conservative. But for me, I would expect $30,000/month or even $60,000 on some hidden coins

  3. Most people would get 7-9% p/a. To get 1% per month is equivalent to 12% p/a . It's unheard of. I'm calling B.S on this.

  4. Hello Morris I have a question let's say you have a property and the main components check out good the roof electrical water heater window plumbing etc. However the property just needs some cosmetic things to make it more appealing to the eye. Can you do a video on a general budget that you have for your fixers? For example I don't spend over .25 per square foot for tile or I don't pay over $2000 for new cabinets or I don't pay over $200 for light fixtures. Im asking because sometimes the prices for materials seem good and you look up and you will have blown your Reno budget…thanks I hope my question makes sense.

  5. I am from Quebec in Canada, it takes min 6 months to kick someone out and the 1 % rule dont exist. Everything is more expensive than that because of our low interest rate

  6. I love your videos! The information you provide is very useful and easy to understand. I'm a college student, and many of my professors aren't able to explain things as clear as you can. I'm very appreciative of your channel. Thanks.😊

  7. I thought the money, you get from your rentals was only called "cash flow," only, after you accounted for all expenses already!!?

  8. I have 2 rental properties. If i pay the mortgage off. I wouldnot be able to deduct my interest on my tax.. i wonder if which way is better off.. pay off mortgage or keep the mortgage so i can deduct thr tax? It may be a dumb question.. but hope someone can break it down for me

  9. Interesting topics, unfortunately this rule doesn't hold true for properties in The Netherlands. Our building methods are much more durable than standard American housing and therefore far more expensive. We are happy to get a return of some six percent on a yearly basis. But still thanks for your videos. They are definitely food for thought.

  10. While the 1% is a good rule of thumb, it is meant to calculate GROSS RENTAL INCOME and not CASHFLOW. Please use the correct terms in future videos.

  11. So if i buy a $1 million property then my net cash flow (Rental income minus PITI minus HOA) should be 10k? Are you sure?

  12. Wish you would use cashflow different than income. Passed this around the lifestyles unlimited club and everyone thought you were nuts until they realised the definition of cash flow to most is "what left after expenses" but is different in this video.

    That said, 1% is easy. 1.5% means you well above average. 2% we are looking for an adjustment in the market coming because something is upside down. Unless you are buying the complete gut jobs in a war zone (one friend has about 30 of them).

  13. Clayton, I love what you're doing here. I've been in real estate investment for 10+ years now and you're spot on. In the future is there a way you can throw the math on a whiteboard?

  14. Seems impossible to get 1% in booming cities like NY, Boston and San Francisco… in Boston you are lucky now to get 1/2%. Maybe with development you can get 3/4% but its hard. I often think about the places that get the 1 or 2% and feel they are a lot more work and with very little appreciation. The appreciation you gain in just a few years in one of these mentioned cities may equal the total "bonus" cash flow you get renting out a 1% rule home for 10 or 20 years . If this is the case I don't see the sense. what I do see is tat not everyone has the money to buy big in places like In Boston which 500k is a purchase price starting point and although you just get your 1/2 % your making a killing on the short term appreciation. for areas far outside the city (the 1 % or more places) your starting point can be only 50k or so and your pulling in that "bonus" cash but it seems like so much more work, more/tougher tenants, more reno etc…. Just my guess.. .curious what others think?

  15. Greetings,
    I want to ask a question:
    This 1% rule is for the purchase price only, without any RENOVATION expenses?
    Example: We buy house for 40 000$. We need rehab for 15 000$. With the 1% rule we seek to be rented for 400$ (1% of the purchase price) or 550$ (1% of the purchase + rehab)?

  16. Great video, I like that rule!

    Borrowing from Investopedia: "Cash flow is the net amount of cash and cash-equivalents moving into and out of a business."

  17. Thank you for your videos. I've now interviewed 3 Turnkeys and found you to be the best bet(all thanks to your videos on doing my research) Can't wait to be buying 2 from you this year!!!

  18. i live in california. why does it seem like the only way i can come close this 1% rule is if i buy a large class c apartment complex? in my area, a single family home that is $300k or more will only rent for MAYBE $2k/month, last I checked..with this in mind, should I not invest in my area?

  19. What if the house appreciates do you use the appreciated figure or only the money you have in it? I think I am content to use the figure I have in it, but curious what you think.

  20. +Morris Quick question… it’s kind of impossible to apply that rule where I live (north of Spain). Here cheaper flats 1 bedroom will be around 70-80k but at max you will be able to rent them for 400€/month… does this mean I should give up on starting a real state investing career here?.

  21. I have found criticism for your turnkey properties in a website saying that your turnkey agents were so busy to respond to clarifying questions from your turnkey customers. I am considering buying a turnkey property so my question is:
    Do all your available turnkey properties really provide ten or twelve years without needing costly repairs in the six areas, a) roof, b) windows, c) electrical, d) plumbing, e) furnace, and f) water heater?
    If I get an answer, I appreciate.

  22. I wish I saw this when originally posted, what if you're able to get more than mortgage monthly cost but it's under 1%?

  23. I bought 9 properties for cash back in 2011 for around 10k – 14k each. I get 725-850 for rents. They paid themselves off in 1.5 years. Now profits are 500-630 per unit.

  24. Just sayin' millionaire does not have the meaning it used to have. Gotta' be at least a multi-millionaire nowadays or you can't even afford a nice well-over 1/2 million dollar home. In Denver, 1/2 million barely buys you an average house. People renting a $40K-$50K home in middle America live better than a millionaire in the Denver area. There ain't no nice $40-$50K homes in a nice neighborhood with decent schools in the Denver area.

  25. I am looking at a home that I am trying to purchase for 120k. I can rent it for $2300/mo. According to your theory, this is nearly 2%, correct?

  26. Hello, I own single family home in Colorado. 3 bedroom 2 car garage with a over grown yard. It's been a rental for 8 yrs with the same renter. They were in it when I bought it.
    I owe 145,000., it rents for 1,300. Obviously it doesn't meet the 1% rule. Two different realtors state it "could sell for 235,000ish with all new floor coverings, entirely painting the interior. Replace old formica with new formica countertops. By the time I pay all the realtor / transaction costs. And improvment costs. I don't see that I would have enough money to find another property that would be a better investment property. I'm currently cleaning, tearing out carpets and scrubbing the boiler heat registers as I'm trying to decide what to do with this thing. I live 7 hrs from this property in a different state.
    Sincerely, unsure Bret

  27. This guy is sadly mistaken. A house Rarely if ever rents for 1% of its value. And hes talking about the possibility of 2%? Is he insane? If he can find someone who will rent a $200,000 home for 4k a month, props to him. But I think a more real number is more like 0.8%

  28. Clayton, I just got $45,000 of credit from Fund and Grow! (Thanks to you). And we just pulled money out of our 401K to cover the remaining purchase amount. We are about to buy our first all cash property from Morris Invest. In our household, I've replaced "Dave Ramsey says" with "Clayton Morris says". These videos have built your credibility enormously in our minds and it's allowing us to put our money into one of your properties confidently. Thank you for changing my family's life for the better. I hope to check in with you in 8 years when I've accumulated 50 rentals like you guys did.

  29. 1-1.5% properties is always pretty hard to find in hot markets. If I would buy in Kansas, Ohio, Oklahoma, then yeah, even 2% is very possible.
    Numbers on my first duplex in Austin, TX, purchase price – 316k, gross rents are 1300 x 2 = 2600, which is 0.82%. And that's a better ratio than vast majority of small multifamilies on our market. You still can find 1% or higher in suburbs or San Antonio markets, but appreciation rate in Austin beats them all.
    Also, I'm buying below market value with small repairs needed, and neighborhood is great, close to Apple and other tech companies offices. That helps a lot.

  30. Lot of people here saying 1% can't be done… maybe not in your market. There are totally properties out there that can do 1%. I have a 6 unit apartment that cash flows 5% every month. You have to look for them, they're out there.

  31. Got my first property 11 months ago for 22k rents for 750. Just bought my second property a week ago for 22k it will also rent for 700-750. Both of my properties were found on the MLS. The deals are out there.
    I love your content Morris Invest! Your content has helped me take the leap and stop talking about and finally do it!

  32. i haven't seen you since you left fox news. haven't watched since. from fox to youtube, hmmmm. hope you are doing good.

  33. Is it supposed to be 1% after hoa and all the other stuff? So if the unit is 100K do I need it to net me $1,000 after all taxes and hoas? Or is it 1% before we lay the other stuff on?

  34. how come the bigger companies didn't buy all the properties yet? is there some legal restriction o. the amount of properties an entity can own or just an ethical barrier that we shouldn't cross? Might sound silly but want to know the answer.

  35. It depends if the property is in a good area and newer property built within 2 to 3 yrs maybe getting a little bit under 1% is probably ok.. There will be less expenses in maintenance as compared to buying an old building that needs a lot of work.. repairs will eat at the profits

  36. Great material very educational! By far the best teachings I’ve seen on real estate! God bless you and your family.

  37. In Sydney, Australia it is approx 0.5% per month return but the property value appreciates approx 4%pa(historically). Could you please share video on how foreign investors can invest in US real estate market. Thanks

  38. Also remember that rents go up as purchase price stays constant. If you start out with a 1% cashflow, it will be higher down the road.

  39. You keep referring to Cash FLow, without defining that. To me, cash flow is Net Operating Income, minus interest expense if you have a loan on a property. I see that Kevin Jacques made a similar comment a year ago. I think what you mean to say is "Gross Rent", not "Cash Flow" when explaining the rule.

  40. I’m confused. You have a video that talks about roi. I want to buy a multi family home at 100k. my roi would would 25%. But if I go by the 1%rule, I’d have to make 1000 a month. At 1000 it wouldnt make the 1%.

  41. I think another way to think about this is a GRM (gross rent multiplier) is 8 or less. Ok, then why do people pay 18-20x gross rents in NYC? Because new buyers think they can kick out rent-controlled tenants or they are from South America or Russia and are hiding money in NYC so they don't care about the 1% rule or the gross rent multiplier. Keep in mind areas with a GRM or 6 or 7 could meet the 1% rule but the tenants don't pay rent! I'm evicting lots of people in Sweet Home Alabama, chop chop!

  42. Excellent
    If I understand correctly then one should sum up all costs ie taxes etc and the rent should be at least 1% of the price paid for property after subtracting expenses for eg expenses $1000 per mth then rent received should total 2000 .

  43. This is why I can’t ever find condos or town homes that make sense. You can’t make the numbers work very easily when you’re paying HOA fees.

  44. So should the 1% rule be complete AFTER expenses are completely calculated? I’m assuming that’s what you’re saying…thank you

  45. Always remember that rules of thumb are just that rules of thumb, used as a very very very early way to qualify a potential property but certainly isn't the end all be all on investing.

  46. All you people are confusing rent gross price with cash flow. Cash flow is what is left after all expenses are paid for. A 1 percent Cash flow in this example means he is getting 1k free and clear after paying all expenses including mortgage and that is highly unlikely. Learn the terms correctly.

  47. Thank you as always. I just run into your video 7days ago. I have learned so much. I am ready for Action. I look forward to talk to ur Team Monday.

  48. is the 1% rule from the total price of the house or from the mortage amount ( price of the house minus down payment ) Thank you for your help.

    If i bought the house for 145000 and paid 20% down, the loan amount would be 116000.Should i calculate 1% of 145000 or of 116000.?

  49. I found it's impossible to meet your 1% rule in Los Angelas area not even in a ghetto neighborhood. Is there a rule for appreciations?

  50. Oops ive been using the 1% rule wrong..ive been figuring it after rehab cost and after taxes and insurance.. So ive been really using a 1.5 percent

  51. I just bought a 1 percent rule duplex, extremely nice area very high appreciation and high cash flow because the previous owner decided to replace and keep up great maintenance on the building. It’s possible you just gotta keep your eyes open

  52. i am from Romania,I have 3 apartments ,1 I bought in 2016 with 37000 euro,rent with 230 euro,and now in 2019 the value is 48000 euro……one 1% is not realistic in our country….

  53. What have most of you guys buying as far as condition? I usually buy stuff that doesn't need much work so I can finance it with little out of pocket after I buy. I like to get in rented out quick. I know some guys buy cheap but then they spend months fixing up and paying contractors thousands out of pocket. Thoughts???

  54. This doesn't seem right. I'm in San Diego and the average house is 500k but the rent would be around 2,800. Also in Arizona I build houses for 200k worth 300k but if I rented them I would only get 1,800 and I build them for wholesale prices. Can someone please explain?

  55. So this rule is basically impossible in ontario canada where in a CHEAP city, a average house is 450k, rent does not go higher then 2-2.5k

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