What Is a 1% Rule in Real Estate? (And When to Use It)
What Is a 1% Rule in Real Estate? (And When to Use It)
The 1% rule is probably the most widely cited rule of thumb in rental property investing. It’s simple, fast, and surprisingly useful — as long as you understand exactly what it does and doesn’t tell you.
The Rule Defined
The 1% rule states that a rental property’s monthly rent should be at least 1% of its purchase price. A $150,000 property should rent for at least $1,500/month. A $200,000 property for at least $2,000/month.
Properties meeting this threshold tend to generate positive cash flow after expenses. Properties well below it — say, $700,000 with $2,800/month in rent — typically don’t.
Why It Works as a Quick Screen
The 1% rule is a fast way to eliminate obviously poor deals from consideration. If someone shows you a $450,000 property renting for $1,800/month (0.4%), you don’t need to build a full financial model to know the cash flow won’t be compelling at current financing costs. The rule saves time by filtering before you do deeper work.
Where It Falls Short
The 1% rule is a screening tool, not a decision tool. It doesn’t account for property taxes, which vary enormously by location. It doesn’t account for property condition and maintenance needs. It ignores HOA fees, insurance costs, and local vacancy rates. A property “hitting” the 1% rule in a high-property-tax, high-expense market may still cash flow poorly.
It also sets a single threshold without considering that different markets have different expense profiles. A 0.85% property in a low-expense, low-vacancy market may outperform a 1.1% property in a high-tax, high-maintenance market.
How to Use It Correctly
Use the 1% rule as a first filter to quickly triage whether a property is worth deeper analysis. Then build a complete financial model on anything that passes. The rule gets you to the right properties to analyze — not to a buy/no-buy decision.
The Bottom Line
The 1% rule is a good servant and a bad master. Learn to use it without relying on it. In cash-flow markets, many properties meet or approach it. In appreciation markets, almost nothing does — which tells you something important about those markets.
Talk to us — we build full financial models on every property we evaluate. The 1% rule is just the starting point.