One Percent Rent-to-Cost Screen
Compare monthly rent with all-in unit cost before buying
- Difficulty
- Moderate
- Time to result
- ~days to results
- Steps
- 4
- Confidence
- 96%
The screen compares expected monthly rent for one unit with the total capital invested in that unit, including acquisition price and planned improvements. Pereira illustrates it with a suburban Atlanta property: an all-in cost just under $170,000 per door against roughly $1,700 in monthly pro forma rent. Dividing rent by cost produces approximately 1%, which he considers a healthy relationship. The ratio makes geographically different opportunities easier to compare and exposes expensive markets where cash flow depends heavily on future rent appreciation. It is a first-pass decision rule rather than full underwriting, but it directs attention toward assets whose current economics can support distributions sooner.
Origin
Robert Pereira used the Preston acquisition to explain the screening ratio behind ARC's Southeast focus. Extracted from Coffeez for Closers.
Core principles
- 01Price and rent must be evaluated together
- 02All-in cost includes planned improvements
- 03Cash-flow fundamentals matter more than speculative appreciation
How to run it
- 1
Find unit acquisition cost
Divide the purchase price by the number of units to establish the cost per door.
Watch out Do not use the total purchase price without normalizing by unit count.
- 2
Add improvement cost
Include the renovation or improvement budget required for each unit.
Pro tip Use the all-in figure rather than the headline purchase price.
Watch out Excluding planned work overstates the ratio.
- 3
Estimate achievable rent
Use a supportable monthly rent after the planned improvements.
Pro tip Distinguish current rent from pro forma rent.
Watch out An unrealistic rent assumption makes the screen meaningless.
- 4
Compute the ratio
Divide monthly rent by the all-in cost per unit and compare the result with the 1% reference point.
Pro tip Use the ratio to compare markets before committing to deeper analysis.
Watch out Do not treat the ratio as a substitute for full due diligence.
In the wild
The Preston cost about $156,000 per unit before roughly $12,000 of planned improvements. With all-in cost just under $170,000 and pro forma monthly rent near $1,700, the ratio was approximately 1%.
→ Pereira characterized the relationship as a healthy ratio and evidence of attractive fundamentals.
Common mistakes
Ignoring renovation cost
Using purchase price alone makes an improvement-heavy acquisition appear stronger than it is.
Using the ratio as full underwriting
The ratio does not account for financing, expenses, insurance, asset condition, or execution risk.
Is it for you?
Best for
It is best for comparing multifamily opportunities across markets before deeper underwriting.
Not ideal for
It is not ideal as a complete investment decision without operating, financing, condition, and market analysis.
From the transcript
“1,700 divided by 170,000 is about 1% it's a very healthy ratio you know you've got a winner when you've got something like that or…”
“the mark California is a great Market but it is more based on speculation that there's going to be continued hyper growth in rents than…”
From the episode
Real Estate Excellence ft. Visionary Robert Pereira
Visionary Robert Pereira