Here's how to use the 1% rule of real estate to find out if a property will generate cash flow

Generating income from rental properties is a lucrative revenue stream. It can be a great source of passive income if it’s done right. Since a large investment is involved while buying a property, it is necessary to do all due diligence and make sure that the property will generate positive cash flow. Here comes the 1% rule that helps to determine cash flow in 5 seconds. Creator Austin Rutherford (@austinrutherfordo) on TikTok, shared brilliant examples of the rule and shared some wisdom on finding out the worthiness of a property for generating positive cash flow.

What Is The 1% Rule In Real Estate and How to Use It?

The 1% rule in real estate investing measures the price of a property against the gross income that it can generate in the future. For a property investment to pass the 1% rule, its monthly rent must come out to be at least 1% of the purchase price. Rutherford explains the calculation in his video, showing how to do it. 

Rutherford says that all people need to do is divide the rent by the purchase price of the property. He shares an example saying if someone buys a house for $150,000 and rents it for $1300, they simply need to divide 1300 by 150,000. 

After that, they need to multiply the result by 100. In the shared example it comes out to be 0.8. This means the property failed the 1% rule and it will not generate cash flow. Rutherford says that the goal should be to at least get 1% which means the house should be rented for at least $1500.

Rutherford then adds this is just the beginning of it. In case the result comes out to be 1%, investors need to go ahead and do their due diligence to find out the property taxes, insurance, and other costs, to see if it cash flows.

Going ahead, Rutherford shares another tip on where to buy properties. He says he buys properties in Ohio as houses in the middle west and the southeast side of the country have the potential to generate cash flow. 

Several viewers found Rutherford’s advice to be helpful. Some users even emphasized the important points. “Heavy on the “do your due diligence” part. Especially in our current interest rate environment. Still, good video and good starting point,” wrote one user, @christian.closed.it. 

Meanwhile, several other viewers suggested that 1% may be too low as nobody is renting properties at that price and making a cash flow. One viewer @southernmotoman “1% is on the very low end. 1.5-2% is where you need to be,” wrote. 

Pros and Cons of the 1% Rule

The 1% rule is good for pre-screening a property to help people decide between a good investment and a bad one. Since it's quick and easy to use, the rule can be great for people to avoid making bad decisions. 

On the other hand, the 1% rule has its limitations, as the ballpark figures don’t factor in costs like maintenance, and other costs. This is why Rutherford suggests people to dig in deep and find out the property taxes, insurance, and other operating expenses.

For more such real estate tips and investment advice, follow Austin Rutherford (@austinrutherfordo) on TikTok.