THE 1% RULE
This rule says that before buying any property, you should check that, if you had to rent it out, you could get at least 1% of the property's total cost in rent. This rule says that before buying any property, you should check that, if you had to rent it out, you could get at least 1% of the property's total cost in rent.
In other words, if you're going to buy a property that costs 100,000 USD, you should be able to rent it out for at least 1,000 USD or more. With this basic rule, you make sure you're not buying an overvalued asset or one without much market demand. Once you start running this analysis, you'll notice certain patterns where you can spot opportunities.
For example, these days the rent-to-cost ratio is much better for 1-bedroom apartments than for 3-bedroom ones. You'll also see that, although there are neighborhoods where the price per m2 is higher, you can also rent there for more, so the rent-to-cost ratio can be much better. Remember that the higher the rent-to-cost ratio, the better your investment, and it should never be below 1%.
The 50% Rule
This rule says 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 if you don't know them precisely yet, you should estimate them. For example, if you're going to rent out a 1-bedroom apartment for 500 dollars, those maintenance costs should be no more than 250 USD a month or 3,000 USD a year.
These costs include:
➢ Property repair costs: such as painting, replacing light bulbs or fuses, air conditioning or heating maintenance, a broken appliance, etc.
➢ Building fees (HOA/condo fees): if the tenant doesn't have to pay them.
➢ Legal fees: if you incur any when renting out your property.
➢ Taxes: usually paid annually.
➢ Real estate agent: if applicable.
➢ Other. The only thing that should not be included in this 50% rule is the cost of the bank loan, if there is one.
The 70% Rule
This rule says you should view a property's purchase price as being, at most, 70% of the total price at the time you sell it, with the sale taking place a couple of years down the road.
So, if this figure is much lower, all the better. For example: for 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 you turn a profit and cover all the associated costs, such as purchase costs, maintenance costs for the years you held the property and selling costs.
In other words, the 70% rule is a basic rule that helps you keep an eye on appreciation. As you start your purchase analysis, you'll see that some areas are appreciating faster than others, and you'll also see that some areas are already overvalued compared with others. Stay alert to see where it makes sense for you to buy.
Question: What is its approximate monthly cash flow?
Solution: Loan amount of $500,000.-, so the approximate loan payment is $3,500 a month. Potential gross annual income = ($7,000 / month x 12 months) = $84,000.- Approximate expenses using the 50% rule = $42,000.- per year, which works out to $3,500.- a month in expenses. Monthly cash flow = $7,000.- (rent) – $3,500.- (expenses) – $3,500 (mortgage payment) = – $0/ month (that is, you pay nothing to acquire the asset). Since this deal cash-flows, it's probably worth looking into further to determine what the real financial picture would look like.
However, your investment strategy, that is, whether you invest in an appreciating asset, a source of income or a balanced return, will help you reach your conclusions.
