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Learn how to evaluate whether a rental property in Queensland is a good investment or not using the one percent rule.

What criteria do you use in selecting a real estate to buy? There is no need to resort to mind-numbing calculations when you only need to know whether or not the rental property would generate positive cash flow in any situation.

1% Rule Explained

One percent rule means that the rent of the property must be equal or higher than the total investment cost. So, a property that costs $200,000 should rent for at least $2,000 per month.

The purpose of the ‘one percent’ rule is to make sure that the rent is greater or at least equal to the mortgage payment. It is a quick estimate which excludes other costs in maintaining the rental property such as actual upkeep, taxes and insurance; although you can make a quick estimate of these things when computing monthly outflows.

Application of ‘one percent’ rule

When you purchase a piece of property for investment, it is vital to conduct a thorough analysis of future rents and compare it with the total cost of the investment property. Any property investor want to make sure that the monthly cash flow is greater than costs. For example, when you buy a $500,000 home with the purpose of renting it out for income and you placed 20% down payment, you have a mortgage of $400,000. Applying the ‘one percent’ rule, your rental property has to be rented out for at least $4000 a month.

Before you look into the possible profits, the first thing to do is to estimate the total cost of the property which includes the following:

Purchase price of the property

Fix-up costs

Financing costs

Carrying costs from the time you purchased the property until your first renter moves in

Let’s compute.

For example, you purchased a single family home at $40,000 and spent $20,000 for the fix up (repairs, wiring, etc.). That’s a total investment of $60,000.

Next, let’s say, you are paying a monthly mortgage of $400. With the help of a professional, you estimated the following costs:

Repairs-$60 per month

Taxes- $100

Insurance-$30

Annual vacancy-$66.7.  You expect that there is at least one month every year that your rental property would be vacant. So, if the rent is $800 a year, the estimated annual vacancy would be $ $66.7 (a month’s rent).

Add these costs and you get the total monthly outflows of $656.7.

To get the monthly positive cash flow, deduct the total monthly outflows from the annual rent and you will get $143.3 positive cash flow every month, a little bit higher than one percent of the total cost.

Important considerations

A licensed conveyancer should guide you through the difficult, but very exciting and lucrative world of real estate. You may need expert advice from professional conveyancers when it comes to assessing whether or not you can afford an investment property, and if you will buy a certain property for investment. It is also important to consider if it will be a negative gearing investment property and the rate of return on investment based on the total cash investment.

Other important factors to consider include-

Tax deductions from investing on the rental property

Weekly out of pocket expenses for the property

Rate of return on investment based on purchase price or cash investment

Capital gain tax if you will sell the rental property

Net after tax profit when you sell the property

Is the 1% Rule Absolute?

The 1% Rule–How to Determine if a Rental Property Can Make You Rich

Learn how to evaluate whether a rental property in Queensland is a good investment or not using the one percent rule.

What criteria do you use in selecting a real estate to buy? There is no need to resort to mind-numbing calculations when you only need to know whether or not the rental property would generate positive cash flow in any situation.

1% Rule Explained

One percent rule means that the…

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