Christian OsgoodCEO, Multifamily Strategy · CEO at Multifamily Strategy

The 1% RULE is Really Hard to Hit Right Now

16 Jan 2024 · 1 min

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In this monologue, Christian Osgood explains the traditional real‑estate "1% rule"—that monthly rent should equal roughly 1% of the purchase price—to gauge cash‑flow potential. He notes that rising home prices and higher interest rates have made achieving this rule increasingly difficult, often leaving investors at break‑even. Osgood then introduces creative financing as a way to secure lower interest rates, shifting the focus from purchase‑price‑based metrics to a cash‑flow‑centric analysis. He advocates using the Debt Service Coverage Ratio (DSCR) as a superior metric, recommending a target DSCR of 1.5 to ensure robust cash flow after all expenses and debt service.

Chapters

A lot of people are saying that the 1% rule is really hard to hit right now. Now, if you're not familiar with the 1% rule in real estate, essentially it's your rent should be 1% of the purchase price and it's likely to cash flow. You buy a deal for a million bucks, $10,000 a monthly rent is going to be a deal that is likely to cash flow. Now, as interest rates have gone up, we're actually seeing a lot of these are closer to break even if they're a 1% rule. But that is something that people are having trouble even finding right now. Prices are high, interest rates are high, people are struggling. What we found is Creative Finance has let us choose an interest rate that allows us to cash flow more. So instead of looking at what are the compared to the purchase price. Let's just compare what is our income compared to our actual expenses. A better metric is called DSCR, debt service coverage ratio, and essentially that's just saying after all expenses including your debt, how much of your mortgage is left over. We found 1.5 DSCR is a deal that is going to cash flow and cash flow well.