The median sale price in Montgomery is $205,000, and the median rent is $1,250. When these two numbers are placed side by side, it shows that the rent is 0.61% of the purchase price. A couple I recently consulted asked if this meant the investment appeal was low since it falls short of the 1% rule, but before making a judgment based on just one number, it's important to consider a few more factors.

Let's start by calculating the total return. The annual rental income is $1,250 multiplied by 12, which equals $15,000. Dividing this by the purchase price of $205,000 gives a total return of 7.3%. This number indicates how significant the rental income is compared to the purchase price without deducting any costs. Considering that the median sale price in Montgomery is 51% lower than the national median, the rental income ratio is not bad given the low entry cost.

Now it's time to deduct costs and calculate the cap rate. The effective property tax rate in Montgomery County is 0.41%, which means the annual property tax for a $205,000 property is about $841. Adding insurance and maintenance costs (1% of property value, which is $2,050 annually), and applying the 50% rule for vacancy loss, the operating expenses are estimated to be around $7,500, which is half of the rental income. The net operating income (NOI) is $7,500, and dividing this by the purchase price gives a cap rate of 3.7%. The difference between the total return of 7.3% and the cap rate of 3.7%, which is 3.6 percentage points, accounts for taxes, management, and maintenance costs.

Returning to the 1% rule that the couple was curious about, 1% of $205,000 is $2,050, but the actual median rent is only $1,250. It's important to remember that the 1% rule is not an absolute standard but rather a guideline used in the industry to gauge cash flow. In a market like Montgomery, where sale prices are low, even if this ratio comes out slightly lower, a cap rate in the high 3% range still seems worth considering.

If purchasing with a loan, the cash-on-cash return should also be examined. Assuming a 20% down payment, the actual cash invested for a $205,000 property would be around $41,000 plus closing costs. If the pre-tax cash flow, including loan interest, is $3,200 annually, the cash-on-cash return could be around 7.8%, which is more than double the previously calculated cap rate of 3.7%. The smaller the absolute amount of the down payment, the greater this gap can be, meaning cash flow is more sensitive to changes in loan conditions.

According to Zillow, Montgomery rental prices have increased by 2.61% over the past year. This is similar to the 2.4% increase in sale prices, indicating that rental demand and sales demand are relatively balanced without leaning too heavily in one direction. However, since Montgomery is a city with significant local variations, it's safer to check the recent rental trends of specific properties of interest individually.

Areas of interest for Korean families in Montgomery include East Montgomery and near Pike Road. While Pike Road has a relatively high school district rating, it's important to note that the effective property tax rate can rise to the highest level in the county at 0.68%. School district boundaries change frequently, so it's advisable to verify the assigned school for the specific address before purchasing. For those relocating from other states, the low property tax in Montgomery County may seem attractive, but keep in mind that Alabama has a structure where both the county and city impose taxes, leading to significant local variations.

From a long-term investment perspective, it's essential to consider not just rental income but also total returns. When factoring in asset accumulation from loan principal repayment, potential appreciation, and tax benefits from depreciation, the actual investment performance may be higher than the cap rate of 3.7%. However, since appreciation depends on market conditions, it's safer not to make definitive predictions.

This article is not investment or legal advice, and it is recommended to consult with a real estate professional before entering into any contracts.