One Percent Rule: A Quick Rental Property Screening Tool
The 1% rule is a simple guideline real estate investors use to quickly evaluate whether a rental property’s monthly rent will roughly cover its mortgage payment. It’s a screening tool—not a substitute for full financial analysis.
What it is
- The rule states that a property should rent for at least 1% of its purchase price (including estimated repair/rehab costs) per month.
- Example: A property with a purchase price plus repairs of $200,000 should produce about $2,000/month in rent (1% of $200,000).
How to calculate
- Add purchase price + expected repair/rehab costs = total investment basis.
- Multiply that total by 1% to get the baseline target monthly rent.
If actual or projected rent meets or exceeds this amount, the property passes the 1% screen.
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Practical example
- Total cost (purchase + repairs): $200,000
- 1% baseline rent: $200,000 × 1% = $2,000/month
- Payoff months (simple): $200,000 ÷ $2,000 = 100 months (~8.3 years)
Note: The payoff months calculation is a rough illustration. It ignores expenses, financing interest, taxes and vacancy.
What the 1% rule does and doesn’t do
- Useful as a quick filter to narrow potential deals.
- Does NOT account for operating expenses such as maintenance, property taxes, insurance, vacancy, HOA fees, management fees, or capital expenditures.
- Should be followed by a detailed pro forma (cash flow, cap rate, cash-on-cash return, financing analysis).
Related calculations and rules
- Gross Rent Multiplier (GRM): price ÷ annual gross rent (a valuation shorthand). Using monthly rent, price ÷ monthly rent gives months to “recover” purchase price (a simplified view).
- 70% rule (used by house flippers): generally suggests paying no more than 70% of a property’s after-repair value (ARV) minus repair costs — a rule for flips, not long-term rentals.
- Cap rate and cash-on-cash return: more comprehensive metrics for evaluating investment returns and comparing opportunities.
Important factors to consider beyond the 1% rule
- Local market rents: If area rents are below the 1% target, you’ll need a lower purchase price or higher yields elsewhere.
- Financing: Interest rate, loan term and down payment materially affect monthly mortgage payments.
- Operating expenses: Property taxes, insurance, utilities (if owner-paid), HOA, routine maintenance, and capital reserves.
- Vacancy and turnover: Budget for expected vacancy (commonly 5–10% of gross rent) and tenant turnover costs.
- Property management: If you use a manager, include typical fees (often 8–12% of rent).
- Condition and location: Repairs, neighborhood trends, and rent growth prospects affect long-term performance.
Bottom line
The 1% rule is a fast, easy screening tool to help investors identify potentially viable rental properties. Use it to narrow options, then perform a full financial analysis—including operating expenses, vacancy assumptions, financing terms, cap rate and cash-on-cash projections—before making an investment decision.