Man, do I love starting and completing series. Welcome to the Become a Bonafide Real Estate Investor series, where we will cover some of the basics of real estate investing. I plan to review some terms, methods, and investing techniques to give you an idea of the real estate professionals’ actions.
I am not a professional real estate investor, nor do I plan to become one. I do, however, own three nice homes that I collect rents from every month. In fact, all my mortgages are fully covered by rental income, including my primary residence.
I love real estate and believe it is one of the best wealth generators outside of business. I have two other real estate series you can read at your leisure: the Creative Financing in Real Estate series and the Pay for College with Real Estate series.
Real Estate Investing 101
Some real estate books I recommend are “Zero Down,” “The ABCs of Real Estate Investing,” and “The Book on Managing Rental Properties.” Now, with all that out of the way, let’s jump into the 1% rule for buying rental properties.
The 1% rule is a quick rule for buying rental properties, but it isn’t the end-all-be-all for making a final decision. It states that by multiplying the purchase price by 1%, you should get the minimum you charge for rent. If the house can meet these criteria, you have a good chance of being cash flow positive from the start.
Let’s do a quick example. If I purchase a home for $150,000, I should be able to charge $1,500/month for rent by following the rule. I don’t know where you live, but this is crazy talk. Where I live, there are no way numbers add up.
I bought my second home for $180,000 in 2017, with a monthly note of $1,050. We began renting it in 2020 for $1,250 (a special discount for the tenant). Next year, we will probably be able to charge $1,500/month.
So after five years, we still wouldn’t hit the 1% rule of $1,800/month. Does this mean that this home was a bad investment? Absolutely not. My wife and I are not real estate investors, and we lived in our home for three solid years. We made great memories there, and now the home is making us cash flow every month.
How to Leverage Real Estate at Any Age
You have to decide what rules to follow and what guidelines you can leverage to succeed in real estate investing. If you are an individual or family that invests, moving from primary residence to primary residence is a great technique to build up your property portfolio.
I have my own technique for getting a better idea of rents and housing costs. I bounce my real estate brainstorming off of Zillow and the US Military Housing allowance database.
If you don’t know, the US Military pays its servicemembers a monthly tax-free housing allowance called Basic Allowance for Housing or BAH. By searching for the zip code on the BAH website, you can get a good idea of what the military gives for rental income in the area.
Play Monopoly in Real Life
Let’s go through the process together.
- Start at the BAH website here.
- Type in the zip code. I will use Biloxi, Mississippi (39530)
- Enter E-9 as the rank. Press enter.
- Use the E-9 with dependents as a marker for what the military will pay senior personnel in the zip code.
Now we can go to Zillow and see if there are homes around the area that we can buy that the rental income fits into the price range. Zillow even does the math for the mortgage costs and the estimated rental income.
When Zillow does the math for the homes, it assumes a 20% cash down payment, so don’t get too excited if you see impressive numbers. If you use a VA Loan or FHA loan, your mortgage may be considerably more if you don’t put down 20%. Let’s see what we can find in Biloxi, Mississippi, for under $1548/month mortgage.
The numbers look pretty good for Bixoi, Mississippi, at least for now. The home is a decent size, looks like a good neighborhood, and numbers check out. However, the price is $30,000 higher (25%) than the Zillow estimate. That could be concerning when trying to get past the appraisal phase.
Maximum Leverage: Buy Homes for Money Down
Our quick due diligence shows us that the military can afford a lovely home in Biloxi under their BAH level. That alone is a miracle. That means that if you can stay under the military allowance, you will have a lot of interest from military folks if you have a base nearby.
Our home in Yuma, Arizona, is the exact opposite. We rent the home for almost $1,000/month-more than my BAH allowance for an E-9 in Yuma. The primary rental market for rentals will be seasonal “snowbirds” coming from Canada or the US Northeast.
So, the 1% rule is a quick check to see where the house fits into the spectrum of rents. Maybe during the housing crash of 2009, it was a good tool. However, prices have moved faster than rents, so the rule is pretty unachievable for now. That is unless you are willing to look into distressed properties or you are looking overseas.
Again, I am not a prominent real estate investor by any means. The military is my wealth generator, and I understand my place. This knowledge allows me to make decisions that fit my criteria and appetite.
I wouldn’t mind buying a rental in Biloxi, even if it was breaking even or clearing $100/month. I can wait as the rent appreciates. You have to find your method and risk tolerance. There is a lot of noise in the realm of real estate, but you have to see what’s best for you and your family.
We will talk more about the real estate mindset as we progress through the series. For now, start doing some research using the BAH calculator in your area. It is a reliable tool to get started. If you can find properties with a mortgage 10% below what the military will pay for rent, you are on to something. Enjoy and Happy Investing!
- Free PDF Downloads: Download FREE PDF books here
- Financial Mindset: Become CEO of Yourself (book)
- Retirement Planning: Retirement Planning at Any Age (book)
- Investing: How We Plan to Retire on Dividends (book)
- Cryptocurrencies: My First Book on Cryptocurrencies (book)
- Real Estate: Financial Independence through Real Estate (book)
- Business: Retire Rich, Retire Comfortable with a Business (book)
- Everything plus way more: The Biggest Book on Passive Income Ever! (book)
- I bought a Kindle Oasis: Check it out Amazon
- Read My Books for Free: Free Kindle Books Schedule
- Sign up to Access our “Hidden” Free Kindle Book Schedule
- My first Children’s book: A Child’s First Book on Passive Income (book)
- Book Reviews: 54 Takeaways from 54 Books (book)
- Want to Build Passive Income from Books and Affiliate Marketing? (Learn here)
- Writing: Can Grammarly Make You a Better Writer? (direct)
- My Favorite Chromebook: The Ultimate Chromebook (direct)
- Follow us: On our Facebook Page and Join our Facebook Group
- Amazon Author Page: Check out my author page on Amazon
Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Leave a Reply