Hi everybody,

There's a question I've been thinking about for a long time, but haven't yet gotten around to investigating. Now that I'm considering buying my first home, with a plan to turn it into a rental when I eventually move out, I think it's time to ask. And the question is very simple: Should the 1% rule of smart real estate investments be indexed to interest rates?

This seems like an obvious yes to me because interest rates directly impact mortgage costs, which directly impacts profitability on real estate investments. For instance, let's say you're considering buying a $300,000 place with 20% down. The mortgage would be $240,000. At 4% interest that comes to $1,146/mo mortgage payments. This looks like a great deal with rental income of $3000 per month (Worse than these numbers suggest because of property tax, maintenance, vacancy, etc, but I think these numbers illustrate a concept). If interest rates increase to 15%, which certainly isn't the case today but my parents tell me was the case in the 80s, that same mortgage would cost $3,035 per month. That's a loss even before we add property taxes, maintenance, vacancy, etc!

How do you all think about this? Are there times when you'd accept properties not meeting the 1% rule because it's still attractive in a low interest rate environment like we currently have? Are there times when properties do meet it but you ignore them anyway because interest rates are too high and the place would be a net loss?