What is the 1% Rule?
The 1% Rule is a quick screening tool used by real estate investors to evaluate whether a rental property has the potential to generate positive cash flow. It suggests that a property’s monthly rental income should equal or exceed 1% of its total purchase price.
This guideline helps investors quickly filter through multiple properties without conducting a full financial analysis on each one. While it’s not a definitive measure of profitability, it provides a useful starting point for identifying promising investment opportunities.
How does the 1% Rule work?
The 1% Rule works by establishing a minimum income threshold that signals a property may be worth further investigation. Essentially, you take the total acquisition cost of a property and multiply it by 0.01 to determine the minimum monthly rent it should generate.
For example, if a property costs $200,000 to purchase, the 1% Rule suggests it should rent for at least $2,000 per month. If the property can only command $1,500 in monthly rent, it fails the test and may not provide adequate returns after expenses.
However, this rule serves as a preliminary filter rather than a comprehensive analysis. Properties that pass the 1% Rule still require detailed due diligence, including calculating actual expenses, vacancy rates, and long-term appreciation potential.
The 1% Rule formula
The formula for the 1% Rule is straightforward:
Monthly Rent ? Purchase Price × 0.01
Or alternatively:
Monthly Rent ? Purchase Price × 1%
To apply it in reverse and determine if a property meets the threshold:
(Monthly Rent ÷ Purchase Price) × 100 ? 1%
This simple calculation allows investors to quickly assess dozens of properties in minutes, making it particularly valuable when scanning listings or evaluating multiple markets.
Real-world application of the 1% Rule in real estate
In practice, the 1% Rule helps investors narrow down their search in competitive markets. Let’s say an investor is comparing three properties:
Property A costs $150,000 and rents for $1,800/month (1.2% ratio). Property B costs $250,000 and rents for $2,000/month (0.8% ratio). Property C costs $180,000 and rents for $1,850/month (1.03% ratio).
Properties A and C pass the 1% Rule and warrant further analysis, while Property B falls short and might be deprioritized. This doesn’t mean Property B is a bad investment—perhaps it’s in an appreciating neighborhood—but it signals that cash flow may be tighter.
Additionally, the 1% Rule’s applicability varies by market. In expensive coastal cities, even strong rental properties rarely meet this threshold. In contrast, many Midwest markets routinely exceed it, sometimes reaching 1.5% or 2%.
How the 1% Rule is used
Investors use the 1% Rule primarily during the initial property screening phase. When reviewing online listings or receiving leads from wholesalers, they quickly calculate whether the rent-to-price ratio meets the 1% benchmark.
Real estate agents and wholesalers also reference this rule when marketing properties to investors, often highlighting when a property “meets the 1% Rule” to attract buyer interest. This shorthand has become common language in the investment community.
Furthermore, some investors adjust the rule based on their market and strategy. In high-cost areas, they might use a 0.7% or 0.8% rule, while those seeking strong cash flow in lower-priced markets might require 1.5% or higher.
In other words
Simply put, the 1% Rule is a quick math check to see if a rental property’s monthly income potential justifies its purchase price. If the monthly rent equals at least 1% of what you pay for the property, it passes the initial test.
Think of it as a first date rather than a marriage proposal. The 1% Rule tells you if there’s enough initial attraction to invest time in getting to know the property better. It doesn’t guarantee success, but it helps you avoid wasting time on deals that are unlikely to cash flow from the start.
