You're analyzing properties in San Francisco or New York using the 1% rule. Every single property fails. Does that mean there are no good investments? Not quite.
Reality Check
The 1% rule was created for markets where $200,000 buys a house. In markets where that same house costs $2 million, the math doesn't work the same way.
Why the 1% Rule Breaks Down
Let's look at a real example from the Bay Area:
But here's the thing: investors ARE making money on this property. They're just using different metrics.
Alternative Rules for Expensive Markets
The 0.7% Rule
Many coastal market investors use 0.7% as their baseline instead of 1%. This accounts for the reality that:
- • Property values increase faster than rents
- • Appreciation is a bigger part of returns
- • Markets are more stable (lower risk)
0.7% Rule Example:
$1,200,000 property × 0.7% = $8,400/month target
Actual rent: $4,500/month
Still doesn't meet it, but we're getting closer to reality.
The Price-to-Rent Ratio
This is actually more useful in expensive markets. It measures how many years of rent it takes to equal the purchase price:
Formula: Purchase Price ÷ (Monthly Rent × 12)
Ratio of 15 or less = Good deal
Common in Midwest and secondary markets
Ratio of 16-20 = Fair deal
Typical in growing cities
Ratio of 20+ = Expensive
Common in SF, NYC, LA—needs appreciation to work
What Actually Works in Expensive Markets
1. Total Return Strategy
Stop looking at cash flow alone. Calculate:
- • Small cash flow (or break-even)
- • + Property appreciation (3-5% annually)
- • + Mortgage paydown (principal reduction)
- • + Tax benefits (depreciation, deductions)
A property with minimal cash flow but 5% appreciation and 3% mortgage paydown delivers 8%+ total returns.
2. Value-Add Opportunities
In expensive markets, forced appreciation through renovations or unit additions can generate better returns than cash flow ever could.
3. House Hacking
Living in one unit while renting others makes expensive markets more accessible. Your housing cost drops while building equity.
Should You Even Invest in Expensive Markets?
Honest answer: It depends on your goals.
You Might Prefer Expensive Markets If:
- • You prioritize wealth building over cash flow
- • You have high income for tax benefits
- • You want to invest where you live
- • You can handle negative/low cash flow
- • You're comfortable with leverage
You Might Prefer Cash Flow Markets If:
- • You need monthly income now
- • You want to quit your job with rental income
- • You're OK investing remotely
- • You prefer lower risk, stable returns
- • You want to scale faster
Real Talk
Most investors trying to build a portfolio of 5-10 properties find it nearly impossible in expensive markets. The capital requirements are too high. If your goal is passive income replacement, Midwest markets make more sense.
Modified Screening Process
Instead of the 1% rule, use this framework for expensive markets:
Check Price-to-Rent Ratio
Under 20 is workable, under 18 is good
Calculate Total Return
Cash flow + appreciation + mortgage paydown + tax benefits
Verify Market Fundamentals
Job growth, population trends, new development
Stress Test
Can you handle 6 months vacancy? What if rates don't drop?
Analyze Any Market Type
Our calculator works for both cash flow and appreciation-focused markets. See your total returns.
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