Guides · 1 minute read
The 1% rule explained
A fast listing filter that can save time, provided you do not mistake it for a full analysis.
The 1% rule says a rental’s monthly rent should be at least 1% of its purchase price. A $200,000 property would need $2,000 in monthly rent to meet the rule.
The rule became popular because it takes seconds to apply while scanning listings. It says nothing about financing and very little about expenses. Its job is to tell you which properties deserve another ten minutes, not which property to buy.
Why the rule exists
Investors noticed that properties renting for about 1% of price often covered a typical mortgage, taxes, insurance and upkeep with something left over. That was truer when interest rates were low. With higher mortgage rates, a property that meets 1% can still lose money each month, and one that falls short can still work if expenses are low or you buy with a large down payment.
Why the rule can mislead
Two properties can both meet 1% and have completely different cash flow. One may carry high property taxes, flood insurance, owner-paid utilities or deferred maintenance. The other may have low expenses and tenants who pay their own utilities.
Market structure matters too. In high-price areas, few sound properties meet 1%. In lower-price areas, many meet it while still needing major repairs or intensive management. Passing the rule is not evidence of a good deal, and failing it is not proof of a bad one.
A better sequence
- Use the 1% ratio to sort a long list quickly.
- Estimate vacancy and every recurring operating expense.
- Calculate NOI and cap rate.
- Add the actual mortgage to find monthly cash flow.
- Stress-test rent, repairs and vacancy before an offer.
The rule is useful when it reduces research. It becomes dangerous when it replaces research.
Common questions
What is the 1% rule in real estate?
It is a rule of thumb that monthly rent should be at least 1% of the purchase price, so a $250,000 property should rent for at least $2,500 a month.
Does the 1% rule still work?
It still works as a quick filter for sorting listings, but higher interest rates and rising insurance and tax costs mean a property that passes can still lose money. Always follow it with a cash flow analysis.
What is the 2% rule?
The 2% rule is a stricter version: monthly rent at least 2% of price. It is rarely met outside low-priced markets, where repair and tenant-quality risks are often higher.
Is a property that fails the 1% rule a bad investment?
Not automatically. A low-expense property, a large down payment, or strong expected appreciation can still make it work. The rule is a screen, not a verdict.
Educational content, not investment, tax, legal or lending advice. Last updated .