The 1% Rule for Rental Property, Explained

The 1% rule is the quickest gut-check in rental investing. Before you build a full pro-forma, it tells you in one line of arithmetic whether a property is even worth a closer look: the monthly rent should be at least 1% of the total purchase price. It's a filter, not a verdict — a way to throw out the obvious non-starters so you spend your time underwriting the deals that might actually work.

The formula

"Purchase price" here means your all-in acquisition cost — the price plus any upfront repairs needed to make the unit rentable, not just the sticker price. A move-in-ready $200,000 house needs to rent for $2,000/month to pass. If it needs $20,000 of work first, the bar rises to 1% of $220,000, or $2,200/month.

A worked example

Take a duplex listed at $250,000 that needs $10,000 of cosmetic work:

At $2,800 against a $2,600 threshold, the duplex clears the rule — barely. That's the signal to keep going, not to buy. The rule got you a yes, look closer; it said nothing about whether the deal actually cash-flows.

Where the number comes from

The 1% rule is a heuristic, not a law of finance. It's a rough proxy for the relationship between rent and price that has to hold for a leveraged rental to cover its mortgage, taxes, insurance, and still leave something over. In low-price, higher-yield markets, 1% is easy to clear and investors often hunt for 1.5% or 2%. In expensive coastal markets, almost nothing hits 1% — which is exactly why the rule falls apart as a universal standard.

Why it's only a screen

The rule ignores nearly everything that decides whether a rental makes money:

• Operating expenses. Two properties with identical rent can have wildly different tax, insurance, and maintenance costs. The 1% rule sees none of it.
• Financing. Your interest rate and down payment drive the actual monthly payment, and the rule doesn't touch either.
• Vacancy and management. Real income is rent minus the weeks it sits empty and the fee to manage it.

A property can pass the 1% rule and still bleed cash every month. Once something clears the screen, run the real numbers: build the property's monthly cash flow line by line, and check its cap rate against comparable sales in the same market. The 1% rule decides what's worth underwriting; those calculations decide what's worth buying.