What Is the 1% Rule?

The 1% rule is a quick screening tool used by real estate investors to evaluate rental properties. It states that a property's monthly rent should be at least 1% of its total purchase price to potentially be a good investment.

How It Works

Formula: Monthly Rent ≥ 1% of Purchase Price

Example: A $200,000 property should generate at least $2,000/month in rent to pass the 1% rule. If it rents for $2,500/month, it exceeds the rule by $500.

Why Landlords Use It

Quick filter: Rapidly assess whether a property is worth deeper analysis. Properties that fail the 1% rule may have negative or very thin cash flow.
Market comparison: Helps identify markets or neighborhoods where property prices and rent are better aligned for investors.
Conservative threshold: Properties that pass typically have decent cash flow potential, though other factors (expenses, financing, condition) still matter.

Important Limitations

The 1% rule is a screening tool, not a complete investment analysis. It doesn't account for:

Operating expenses (property taxes, insurance, maintenance, HOA fees, utilities)
Vacancy rates and tenant turnover costs
Financing terms (interest rate, down payment, loan term)
Property condition and needed repairs
Market appreciation potential
Property management costs

Properties that fail the 1% rule can still be good investments in high-appreciation markets (like many coastal cities). Conversely, passing the 1% rule doesn't guarantee success if expenses are high or the market is declining.

Market Variations

The 1% rule is easier to achieve in lower-cost markets and nearly impossible in expensive coastal cities where appreciation drives returns more than cash flow. Some investors use:

0.7% rule for high-cost markets (San Francisco, New York, Los Angeles)
1% rule for moderate markets (most mid-sized cities)
2% rule for cash-flow-focused investors in low-cost rural markets

Next Steps After Screening

If a property passes the 1% rule, conduct a full financial analysis:

Calculate actual cash flow using the Rental ROI Calculator
Estimate maintenance reserves using the Maintenance Reserve Calculator
Analyze mortgage costs with the Mortgage Payment Calculator
Review comparable rental listings to verify rent assumptions
Inspect the property for condition issues and repair costs

Bottom line: Use the 1% rule to quickly filter out properties that are unlikely to cash flow, then perform detailed analysis on the ones that pass. It's a starting point, not a final decision tool.