Investing 101: What Is the 10% Rule in Real Estate Investing? (2024)

January 1st, 2021

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• 6 min read

Are you having some trouble getting the right approach to real estate investing? It’s easy to get burned on properties that you felt would make you a lot of money.

It might not be the properties that are failing you, though. It could be the way that you’re investing in real estate and the strategies you use in the process. We’re going to take a look at what’s called the “10 percent rule” today.

Hopefully, the ideas below give you some new perspective on investments and how you can shift your tactics to increase ROI. Let’s get started.

What Is The 10 Percent Rule?

The 10 percent rule is actually a set of a few rules that helps investors conceptualize potential purchases and manage the decision-making process on new properties.

There are three rules included, and one of them might be a little outdated, but we’ll address that when we get there. The first piece of the 10 percent rule is that you should never put more than 10 percent down on a property.

Again, this is only for real estate investors or those whose primary goal is to make money from the property. Putting more money down on a residential home might be a great idea because it allows you to make lower mortgage payments.

To investors, though, it’s a little bit different. Let’s explore why.

No More Than 10 Percent Down Payment

Say, for example, that you purchased apropertyfor $150,000. Following the rule, you put $15,000 (10 percent) forward as a down payment.

Think of that 10 percent as all the skin you have in the game. The bank took care of the rest, and you’ll cover that debt when you sell the home. Now, let’s also say that the home appreciates by $15,000 in the first year.

The total value of the home rises to $165,000. While it may seem like that’s a small percentage to increase, the reality is that youractual investment into the home was $15,000. That means that your investment doubled in the first year if you look at things this way.

The less money you put forward, the more liquid cash you have in your bank account to put toward other investments that could be making you money.

Say that you had $100,000 to invest for a particular year. You could invest that entire amount into a single $150,000 house and earn back that same $15,000, just with a very small mortgage payment.

That’s a 15% return. Now, say that you put $10,000 into ten different houses with the same ROI. In that case, you’d make $150,000 over the course of that year and more than double your initial investment.

Buy At Least 10 Percent Under Market Price

The second piece of the 10 percent rule is to avoid purchasing anything that’spriced more than 10 percent under market value.

There are numerous ways to seek out properties that are priced lower than the market value. Foreclosures and auctions are good places to find these deals. It’s also possible to find excellent deals if you’re able to recognize faults in pricing, factors that might make a home more valuable, and more.

However you find those properties, the important thing is to make sure that they’re 10 percent under market value. This allows the investor to make back their initial down payment on day one.

You put 10 percent down, and the home is worth 10 percent more than you paid, so selling the home right off of the bat would put you even. Now, there are a lot of fees and costs associated with selling a home, so you would lose money if you turned the house around and sold it the first day.

You’re not going to do that, though. The fact is that following this plan puts you at a perfect place to start making a profit right away, minus costs associated with buying.

Never Pay More Than 10 Percent Interest

This is the rule that’s outdated. Mortgage rates are far lower than ten percent in this day and age, and anyone who tells you differently is scamming you.

There was a time when rates approached 19%, and that would have been the time to use the rule as it was originally stated. That said, even the 3-year ARMs are below 5% these days, so rates are relatively favorable to investors right now.

30-year fixed-rate mortgages are well below 3%, and everything else is relatively close to that rate. That said, rates change based on the down payment, credit history, and a number of other factors that you know well.

Based on your personal situation, it’s good to set a rule for yourself concerning the mortgage rate that you’re willing to pay. Maybe you’d like to try and pay a little less than the average rate for the current year, or never pay more than the national average.

Whatever your rule is, it’s important to factor it in and follow it. Don’t take this piece of the 10 percent rule into your investment plan, though, because a 10 percent interest rate is out of this world.

Do You Need a Little Help?

All of these factors look good on paper, but finding the right properties and dealing with them can be another story. It’s hard to stay true to your rules in the real world.

Different factors arise, properties pop up and seem enticing, and it’s easy to get sidetracked. It helps to have a little professional assistance on your side when it comes to real estate.

Real estate investment companies are excellent at managing your properties, tracking your investments, and keeping you on track to meet your financial goals. They’re experts at investing in real estate, so you’ll be in capable hands.

Want to Learn More About Real Estate Investing?

Real estate investing is a complex thing, and it requires a lot of knowledge to do well. There are a lot of approaches, data sets to keep track of, and other things to know that will set you up for success.

We’re here to help. Explore our site for professional insights into real estate investing, properties in your area, and much more.