Key facts
- Investors use the '1% rule' to quickly assess if a property's monthly rent is at least 1% of its purchase price.
- Some investors aim for rents closer to 1.25% of the purchase price to create a buffer for expenses.
- Developers use the '1% rule' in reverse, calculating how much they can spend on construction based on projected rents.
- Maximizing income per parcel can involve adding storage units or other amenities to rental properties.
- Renting by the room can increase overall rental income and spread vacancy risk.
- Mid-term rentals, typically leased for 30 days to a year, offer a middle ground between long-term and short-term rentals.
Real estate investors are employing specific strategies to ensure their rental properties generate consistent cash flow. These methods range from quick evaluation tools to creative approaches for maximizing income from each property.
One widely used guideline is the '1% rule,' which suggests that a property's monthly rent should be at least 1% of its purchase price. For example, a $120,000 property should ideally rent for $1,200 per month. Some investors, like Ted Garber, prefer a wider margin, aiming for rents closer to $1,500 on a $120,000 condo to build in a buffer for expenses and ensure immediate cash flow. This rule is also adapted by developers, such as Brannon Potts, who use it to determine how much they can afford to spend on construction based on projected rental income.
Potts also emphasizes maximizing income from the land itself. This can involve choosing multifamily properties over single-family homes or finding additional revenue streams on the same parcel. He successfully added four storage units to a triplex development, generating an extra $220 per month for an initial investment of less than $20,000.
Another strategy gaining traction is renting by the room. Investors like Peter Keane-Rivera and the couple Jeff White and Suleyka Bolaños buy larger houses and rent out individual bedrooms. This approach can significantly increase gross rental income, with White and Bolaños estimating an additional $1,600 to $2,000 per month by converting a five-bedroom home into a seven-bedroom one. This method also diversifies vacancy risk, as multiple tenants mean a single vacancy has less impact on overall cash flow. However, it requires more intensive management due to potential compatibility issues among tenants.
Some investors are also exploring mid-term rentals, which fall between traditional long-term leases and short-term vacation rentals. These furnished properties, typically leased for more than 30 days but less than a year, appeal to traveling professionals or those needing temporary housing. Zeona McIntyre describes this as a 'sweet spot,' potentially offering higher revenue than long-term rentals without the constant turnover and booking management of short-term options.
Ultimately, the consensus among these investors is that achieving positive cash flow is not about a single formula but about creative application of strategies tailored to specific markets and property types.