Courtesy of Atif Afzal
Atif Afzal got into real estate to create cash flow.
As a freelance film composer and singer-songwriter, his monthly income has always fluctuated. He wanted a second income stream to create more financial stability in his life.
Since starting his real estate investing career in 2019, when he bought his first property in Monroe, New York, Afzal has followed a few basic guidelines to maximize cash flow: He self-manages his rentals and buys townhomes or condos in excellent condition.
He's also adhered to what's known in real estate as the "1% rule," which suggests that to create positive cash flow, the monthly rent of your property should equal at least 1% of the purchase price. If it doesn't, the rule suggests you should keep searching for properties.
For example, the first property he purchased cost about $200,000, and he rented it for $1,975 a month, giving him a rent-to-purchase price ratio of nearly 1% (0.98%). His second property cost $211,000 and rented for $2,100, yielding a ratio of 0.99%. His third matched the rule even better with a 1.125% ratio.
Afzal said it's trickier to follow the rule in today's challenging market. For his properties, at least, it's "vanished."
His first property is now worth $350,000 and rents for $2,650. That's a rent-to-purchase price ratio of 0.76%. His second is worth $350,000 and rents for $2,780, yielding a ratio of 0.79%. The ratio on his third has dropped to 0.89%.
"The valuation of the property has gone up way more than what the rent has gone up. It's not commensurate," he said. And it's not just his portfolio of condos that is failing the 1% rule — it's most properties he's looking at in his market. "The whole rationale behind the 1% rule is to see if you can offset your mortgage and everything. Now, you just can't offset it. Your HOA fee has increased, your insurance has gone up, maintenance has gone up. So, all in, it's not as lucrative as it used to be."
The market dynamics are making it extra tricky for new investors to get started.
He cited his sister and brother-in-law, who are looking to buy an investment property in upstate New York, but were deterred after estimating their cash flow based on purchase price, interest rates, and monthly rent.
"Her last calculation, she was overshooting by about $500 a month," said Afzal. "That's not encouraging for a first-time investor that, in spite of all the money that you put in, you're still going to be paying $500 out of your pocket every month."
As a more seasoned investor with a long-term perspective — he started buying real estate five years ago and owns four investment properties and a primary home, which BI verified by looking at his tax documents — he's not worried, nor is he changing his strategy. He expects market fluctuations, as he does with stock market investments, and believes his buy-and-hold strategy will reward him in the long run, even if his cash flow takes a hit momentarily.
"Things are going to fluctuate, but you need to ride the wave," he said.
As for expanding your real estate portfolio during a time like this, "of course, you can take a bit of a breather," said Afzal, who still looks at properties regularly and is ready to buy when he finds the right deal. However, "I really don't believe in the concept where you need to just stop and wait it out."
Are you a real estate investor who uses the 1% rule? We'd like to hear from you! Email kelkins@businessinsider.com to share your story.
