RULE 1% RULING
This rule consists in the fact that before buying any property, you should analyze if you have to rent the property, you should be able to do it for at least 1% of the total cost of the property. This rule consists in that before buying any property, you should analyze if you have to rent the property, you should be able to do it for at least 1% of the total cost of the property.
In other words, if you are going to buy a property that costs 100,000 USD, if you have to rent it, you can do it for at least 1,000 USD or more. With this basic rule, you guarantee that you are not buying a property that is overvalued, or that does not have much commercial demand. When you start doing this analysis, you will see that there are certain patterns where you can see opportunities.
For example, nowadays, the rent/cost ratio is much better in 1-bedroom apartments than in 3-bedroom apartments. At the same time, you will see that, although there are neighborhoods where the square meter is more expensive, you can also rent them for a higher price and therefore, the rent/cost ratio can be much better. Remember that the higher the rent/cost ratio, the better your investment will be and it should not be less than 1%.
50% Rule
This rule is that all your operating and/or maintenance expenses should not exceed 50% of the rent you would receive. Remember to include all costs, both monthly and annual, and in case you don’t know them precisely yet, you should estimate them. For example, if you are going to rent a 1 bedroom apartment for $500. Maximum those maintenance costs should be 250 USD per month or 3,000 USD per year.
These costs include:
Costs of repairs to the property: such as painting, replacement of light bulbs or fuses, maintenance of air conditioners or heating, any appliance washing, etc.
Expenses: in case the tenant does not have to pay them.
➢ Lawyers’ fees: if incurred when renting your property.
➢ Taxes: normally annual.
➢ Real estate agent: if applicable.
➢ Other. The only thing that should not be included within this 50% rule is the cost of the bank loan if any.
70% rule
This rule consists of looking at the cost of the purchase of a property, as if it were a maximum of 70% of the total cost at the time of its sale. Being the date of its sale in a couple of years later.
Therefore, if this value is much lower, the better. As an example: an apartment that costs 50,000 USD, you should aim to sell it for at least 71,429 USD (50,000 /70%). This way, you make sure to earn and cover all the associated costs, such as: the purchase costs, the maintenance costs during the years you kept the property and the selling costs.
In other words, the 70% rule is a basic rule that allows you to keep an eye on appreciation. As you begin to make your purchase analysis, you will see that there are areas that are generating capital gains faster than others and you will also see that there are areas that are already overvalued compared to others. Keep your eyes open to see where it is best for you to buy.
Question: What is your approximate monthly cash flow?
Solution: Loan value of $500,000.- so the approximate loan payment is $3,500 per month. Annual gross income potential = ($7,000 / month x 12 months) = $84,000.- Approximate expenses using the 50% rule = $42,000.- per year corresponding to $3,500.- per month in expenses. Monthly cash flow = $7,000.- (rent) – $3,500.- (expenses) – $3,500 (mortgage payment) = – $0/month (i.e. you pay nothing to get the asset). Since this deal flows, it is probably worth investigating further to determine what the actual financial picture would look like.
However, your investment strategy, i.e., investing in an appreciating ace, a source of income or a balanced return, will help you reach your conclusions.
