What is the 1% Rule?
The 1% rule is a quick screening guideline used by real estate investors to evaluate whether a rental property is worth investigating further. It states that the monthly rental income should be at least 1% of the total property purchase price.
Simple Definition
Monthly Rent ≥ 1% of Purchase Price = Property Passes the 1% Rule
Quick Examples:
$200,000 property × 1% = $2,000/month rent
Actual rent: $2,200/month
$400,000 property × 1% = $4,000/month rent
Actual rent: $2,800/month
How to Calculate the 1% Rule
Step-by-Step:
Step 1: Identify Purchase Price
Include the total acquisition cost (asking price + closing costs + any immediate repairs).
Example: $300,000
Step 2: Calculate 1% of Purchase Price
Multiply the purchase price by 0.01 (or simply move the decimal two places left).
$300,000 × 0.01 = $3,000
Step 3: Compare to Monthly Rent
Check if the expected monthly rent meets or exceeds the 1% threshold.
1% Threshold: $3,000/month
Actual Market Rent: $3,200/month
Result: PASSES (1.07%)
Why the 1% Rule Matters
The 1% rule helps investors quickly filter out properties that are unlikely to produce positive cash flow before conducting detailed analysis. It saves time by identifying deals worth investigating.
Benefits
- • Quick screening tool (30 seconds)
- • Eliminates obviously bad deals
- • Easy to calculate mentally
- • Good starting point for beginners
- • Helps focus on promising properties
Best Use Cases
- • Initial property screening
- • Comparing multiple markets
- • Quick "back-of-napkin" analysis
- • Setting search parameters
- • First-pass due diligence
Important Limitations of the 1% Rule
Warning: Not a Complete Analysis
The 1% rule is a screening tool, NOT a complete investment analysis. Never make investment decisions based solely on this rule.
Doesn't Account for Operating Expenses
The rule ignores property taxes, insurance, maintenance, HOA fees, property management, and other expenses that significantly impact profitability.
Ignores Financing Terms
Doesn't consider down payment amount, interest rates, or loan terms—all critical factors for cash flow analysis.
Varies by Market
Properties in expensive markets (NYC, SF, LA) rarely meet the 1% rule but may still be good investments due to appreciation potential and other factors.
Oversimplifies Complex Decisions
Doesn't consider location quality, property condition, tenant quality, local market trends, or long-term appreciation potential.
Alternative Screening Rules
2% Rule
More aggressive screening: rent should be 2% of purchase price.
Example:
$150,000 property
= $3,000+ rent needed
Rare in most markets; typically only achievable in low-cost areas.
0.7% Rule
More realistic for expensive markets like coastal cities.
Example:
$500,000 property
= $3,500+ rent needed
Used in high-appreciation markets where cash flow is secondary.
50% Rule
Assumes operating expenses equal 50% of gross rent.
Example:
$2,000/mo rent
= $1,000 for expenses
More comprehensive than 1% rule; includes expense estimation.
Real-World Application
The Right Way to Use the 1% Rule:
Initial Screening
Use the 1% rule to quickly eliminate obviously poor deals.
Detailed Analysis
For properties that pass, conduct thorough cash flow and ROI analysis.
Market Context
Adjust expectations based on local market conditions and investment strategy.
Final Decision
Make investment decisions based on complete analysis, not just the 1% rule.
Go Beyond the 1% Rule
Use our comprehensive calculator to analyze cash flow, cap rate, ROI, and all the metrics the 1% rule doesn't cover.
Try Full Analysis Calculator