What is the One Percent Rule?

The 1% rule states that a property's monthly rent should equal or surpass 1% of the entire investment. This is an unofficial rule with its own set of constraints, but it can assist investors in finding profitable properties.

The 1% rule can help investors swiftly assess a possible property's ability to generate monthly rental revenue, albeit it isn't the only tool for study. If you're looking for a good investment property, the 1% rule can help you find it.

How to Calculate the 1% Rule in Real Estate?

The 1% rule in Real Estate is calculated as follows:

(Monthly rent is less than 1% of the total investment)

The concept is that if you can stick to the 1% rule, you should be able to cover your monthly costs and have a positive cash flow on the property. Thus, the 1 % rule calculator is a handy tool that provides an investor with an initial point from which to analyse other variables related to property ownership.

How Does it Work?

The 1% rule is easy to apply. Simply multiply the property's purchase price by 1%. The end result should be the bare minimum in monthly rent.

If the property requires any repairs, include them in the computation by adding them to the purchase price and multiplying the total by 1%.

Example of One Percent

Consider the following example for a property worth INR 15,00,000

15,00,000 x 0.01 = 15,000

Using the 1 percent guideline, you should look for a mortgage with a monthly payment of INR 15,000 or less, and charge your renters INR 15,000 in rent.

Assume the house needed INR 1,00,000 in repairs. Then, in such a case, this cost will be added to the home's purchase price, resulting in a total of INR 16,00,000. Then you'd divide the sum by 1% to arrive at a monthly payment of INR 16,000.

One Percent Rule Real Estate

In real estate Investing, the 1% rule compares an investment property to the gross revenue it will yield. The monthly rent must be equal to or less than one percent of the purchase price for a potential investment to pass the 1% rule.

One Percent Rule Trading

A large number of day traders uses the one-percent rule. According to this, you should never invest more than 1% of your cash or Trading Account in a single deal. So, if you have INR 1,00,000 in your trading account, you shouldn't have more than INR 1000 in any specific asset.

Traders with accounts of less than 1,00,000 frequently employ this method, with some even going as high as 2% if they can afford it. Many traders with larger accounts will opt for a lesser proportion. The best way to keep your losses under control is to keep the rule at 2%—any higher, and you'll be putting a significant amount of your trading account at risk.

Is the 1% Rule Realistic?

This rule is popular, yet it has serious shortcomings. For example, properties that don't fit the 1% rule aren't always terrible investments. Property that meets the 1% criteria isn't always a Smart investment. This rule doesn't apply to all real estate markets. So it can be inferred that other factors should also be given mere importance before investing.

Alternatives to One Percent Rule

The 1% rule isn't the only technique to determine a property's potential profit. Here are some more statistics that real estate investors use to assist them in choosing a property:

• Capitalisation Rate - The capitalisation rate, sometimes known as the cap rate, is the net operating Income divided by the price. Investors use this ratio to compare various investment properties

• 50% Rule - It states that you should set aside 50% of your monthly rent for monthly costs, excluding the mortgage

• Internal Rate of Return (irr) - Your annualised rate of return on your investment is your internal rate of return. Within a firm, it's used to compare investments to predicted rates of return

• 70% Rule - It states that you should never spend more than 70% of a property's after-repair worth on it

• Gross Rent Multiplier(GRM) - Subtract the property's Market value from its annual gross income to get the GRM. The figure that results is the number of years it will take for the investment to pay off

• Investment Return - ROI is determined by dividing net cash flow by the amount invested, often known as a cash-on-cash return. As a general guideline, aim for an ROI of at least 8%

The Bottom Line

The 1% rule isn't perfect, but it can be a useful tool for determining whether or not a rental property is a suitable investment. It should be used as an interim pre-screening tool to assist you to filter down your alternatives as a general rule of thumb.

If you're new to real estate investment, obtaining a loan that meets your long-term objectives is critical.