Tailwind Talks
Tailwind Talks is a podcast for high-performing professionals who want to build serious real estate portfolios without leaving their careers. Hosted by an airline and military pilot turned investor, it dives into actionable strategies for scaling your real estate portfolio while balancing the demands of a full-time job.
Tailwind Talks
Why the 1% Rule Will Make You Go Broke in Real Estate
The real estate investing world is full of so-called "rules" that promise success, but few are as potentially destructive as the popular 1% rule. As someone who balances being a legacy airline pilot, military instructor, and property investor, I've seen firsthand how this oversimplified formula leads well-meaning investors straight to financial trouble.
Today's property market with interest rates exceeding 7% makes this rule particularly dangerous. Let me walk you through the harsh reality: that $100,000 property generating $1,000 monthly might seem promising on paper, but once you factor in mortgage payments ($700+), property management (10%), property taxes ($300+), and utilities ($100+), you're operating at a loss before any maintenance issues even arise. And they will arise – no property exists without eventually needing a new roof, furnace, or major repair.
I share a concrete example from my own portfolio to illustrate what actually works: a $68,000 property generating $1,100 monthly rent (far exceeding the 1% threshold). This substantial margin provides the breathing room necessary for real-world property ownership. The investors who succeed don't blindly follow formulas – they meticulously analyze cash-on-cash returns after accounting for all expenses, both predictable and unpredictable.
If you're serious about building wealth through real estate, you need to look beyond simplistic rules and understand the complete financial picture. When someone tries selling you on a property because "it meets the 1% rule," they're counting on your inexperience. Join me as I continue sharing lessons learned the hard way, so you don't have to experience the same painful and expensive education. Subscribe now for regular insights that cut through the myths and reveal what really drives successful property investing.
What's up everybody? My name's Colm, a part-time real estate investor, full-time legacy airline pilot and a part-time military instructor pilot. Today I'm gonna talk about why I think the 1% rule that people preach, like it's the gospel, is BS. It's gonna get you in a bad situation and you're probably gonna end up losing money because of it. The 1% rule, simply put, is that I'm gonna purchase a property and I want it to rent for month. So on a $100,000 property, that would look like $1,000 a month. And here's why it doesn't work. In today's day and age, with rates over 7%, it's a terrible idea. Just off of the seven and a quarter rate alone, you're going to be over $700 a month just to service the debt, which means paying principal and interest every month. You haven't done anything else. That's just paying for the loan. Okay, and that's assuming that you put 20% down, which not everybody's going to do. Some people are going to do 3% down, 5% down, 10% down, which is going to increase that number because you're borrowing more money, right.
Speaker 0:Then you go to the next step and I always say to get a property management company. So in this example, I'm going to assume that you get a property management company because you're a professional working another normal job, like I am, and you can't do it full time. You're paying 8% to 10% more than likely 10% per month just to get the property manager and you can say, oh, I'm going to manage it myself, I don't need a property manager, I've got this. That's absolutely fair. You can definitely do it yourself, but if you're going to get a property manager, like I recommend, you're going to end up paying about that much. That's $100 a month, right off the bat. Then you got property taxes At least for me in Milwaukee. You're adding an extra $300 on top of the 700 some dollars you're already paying for principal and interest payments. So you're already at your $1,000 threshold.
Speaker 0:The rent's already gone. There's no profit left over, right. There's no cash on cash return, like I always talk about. But you still haven't covered utilities. Unless it's a single family house in most cases duplexes, unless they're separated completely you're going to be paying utilities, right, and usually that works out to be about $400 a quarter, and you can do the math. That's a little over $100 a month, right?
Speaker 0:So now you're well into the negative. You're not even close and nothing bad has happened. No one's throwing a rock through the window, A furnace hasn't blown up, Water heater's not leaking, Toilet's not backed up, no service calls, no problems. That's assuming that everything goes perfectly and you're already that negative. Not great. Assuming that everything goes great. Otherwise the property is already negative.
Speaker 0:You haven't even begun to address capex, which is capital expenses to fix up things on the property that don't ever make you more money. That's talking about the roof, the siding, the concrete, the things that you need to do to keep the property in good order but don't actually bring any more rent. No one's going to pay extra rent because you have a roof that doesn't leak. No one's going to pay extra rent because you have a non-cracked sidewalk or a basement that's not caving in. These are things that are just prerequisites to having a property that's livable and rentable. You have to do those things. You don't have a choice for that and you can't set aside any money in the case of this property to do that.
Speaker 0:This is just a random example $100,000 purchase price, $1,000 a month in rent. It does not work. You cannot purchase properties off the 1% rule. You're going to go bankrupt before you even start. People that are selling the 1% rule are oversimplifying this game. You can't blindly take that advice and just take it to the bank. You're going to go bankrupt. So you need to sit down. You need to really crunch the numbers on the property that you're looking at and really understand what it costs to run a property every month. If it was as simple as the 1% rule, everybody would be doing it, and not everybody's doing it for that exact reason, because it's not that simple.
Speaker 0:Real estate has so many variables that you can't account for with just a simple equation like that. You have to be able to predict the unpredictable, which by nature, is impossible. So you have to have a buffer, right. That means that you need to be renting things for maybe $1,500, $2,000 a month for that same purchase price, to give yourself some breathing room, because you're not going to be able to address these issues when they come up and they're going to come up. I promise you that if you're expecting to buy a property that's never going to give you any problems and you're never going to have a bad month, then you are in the wrong business and you're going to be devastated when something goes wrong because it's going to. I have yet to find a property that's never had a single issue. So you need to bet on the fact that it's going to. If you don't do that, if you don't build that into your math, if you don't build that into your reserves, you're going to get squeezed to death and then I'll be buying your properties for a lot cheaper than what you paid for them.
Speaker 0:Don't shoot the messenger, but that's the absolute truth. Cash on cash returns like I've always preached are the only way to go. You have to look at what you expect to get. After everything is said and done, you need to look at the post expense dollars. You can't look at pre expenses. You can't look at gross rents. You can't look at projected rents and appreciation. All this stuff is all speculation and you're gonna get killed because of it.
Speaker 0:If you're looking at your $1,000 a month, I would take 40% right off the top $400 a month right off the top for just expenses. Whatever that may be. That may be unscheduled maintenance, that may be scheduled maintenance, that may be property management taxes you name it. That will kind of cover it. And then from that point you want to look at what's left over the $600 a month and how you can service the debt with that. The way to get around.
Speaker 0:All this is to put down more money. I don't love that. I like to put down as little money as possible, With giving myself some breathing room and some upside. There's a balance to that and I'll make a video about that probably too, but I prefer to put as little money down as possible on a property that I think has upside. If you're buying a property, you think it has upside, so that's kind of a non-starter. Some things you can look at to try to reduce the monthly expenses are better neighborhoods, which usually yield better quality tenants, trying to screen your tenants better if you're managing things yourself. But honestly, some of that is just shooting in the dark. Sometimes it's going to go well, sometimes it's going to go bad. You really can't bet the farm on that. Even with some of my better deals that I bought well above the 1% rule.
Speaker 0:I can give you an example of a property that I just purchased and I paid $68,000 for a property that rents for $1,100 a month. That would be more so where I want to be. Obviously I bought that property so I believed in it. But you can see in the example I gave you, at the $100,000 purchase price there's no way it works. But in the case of a $68,000 purchase price with a little bit over $1,000 a month, it actually does work. That's an example of something that I think can cash flow. If you guys want, I can actually make a video about that specific property or a different property. Show you the inside, the outside, the whole deal, but I don't want to get too into the weeds if people aren't really interested in that.
Speaker 0:I see people listing properties saying it meets the 1% rule all the time. It's a cash cow, it's a this, it's a that. If they're trying to sell you on the 1% rule, they're hoping that you're an uneducated buyer, because the only people that would go for that are people that don't know what they're doing. Trust me, I've seen it play out many, many, many times and there's a reason that I'm so picky on the deals that I buy because I know that if you buy something that's interested in real estate at all, I'm gonna continue to document my journey and provide lessons on things that I learned the painful way, so that you don't have to. If you got anything out of this, leave a like, a comment, whatever it may be. I really appreciate it and I know that you could be anywhere on the internet, but you're here right now, so I genuinely, genuinely appreciate that. I'll talk to you.