Rules of Thumb: A Short History
The entire concept of 'rules of thumb' is pretty attractive. In our 'bury you in information' world, having some simple ways to make decisions sounds pretty darn good. Quick and dirty tools to help you sort things out. I like it. If you are into that kind of thing, you can read about the origins of the phrase 'rules of thumb' in Wikipedia here. If that doesn't get you excited, I'll give you a short summary here: no one really knows. But the 'common' idea is that carpenters used their thumb to approximate measurements. That seems pretty close to the idea to me. So rules of thumb promise a way to cut through complex decisions like a hot knife through butter. In real estate, there are many rules of thumb related to investing.
The 1% rule. This is supposed to help you figure out if the home you are buying can cover the mortgage you have. So you take your mortgage amount (say $100,000) and you take 1% of that (or $1,000) and that is what your monthly rent needs to be in order for you to at least break even. Sorry, but this one is only good in select circumstances folks. What if I put down 50%? What if I'm in a luxury housing area? What if there is a housing shortage of some type so market forces are pushing rents up far more than average? The 1% rule is not a useless rule of thumb, just limited. Here's someone who made good use of it for exampleHere's an article that outlines 3 more investor 'rules of thumb', and he rates them (one gets a B, another an F-! Not sure you can give an F- but hey, he doesn't like that rule of thumb I guess!) Maybe this takes all the romance out of the process, but since today nearly everyone has a smartphone and those smartphones are more powerful than the computers that sent the first men to the moon, why are we figuring things out with rules of thumb anymore anyway? Why not just set up a spreadsheet that looks at things how you care to look at them, with your own criteria, and when you see a property, plug in the variables and let the computer do the work of the rule of thumb? Using a thumb to measure your carpentry was a helpful tactic in the days before tape measures. And while real estate rules of thumb might be good for back of the napkin and party conversation estimates, no real investor in their right mind should invest in something without running the numbers. And for that, we have spreadsheets and more nuanced calculations. Could I be wrong? I suppose. Is there a rule of thumb about using rules of thumb?