What the 1% rule is (and isn’t)
The 1% rule says a rental is worth a closer look if its monthly rent is at least 1% of what you pay for it, including repairs. It is a rule of thumb that investors use to sort listings quickly. No law, regulator or lender defines it, and passing it doesn’t mean a property will make money. Use it to decide which listings deserve a full analysis.
How the calculator works
- Rent-to-price ratio = monthly rent ÷ (purchase price + rehab)
- Rent needed for 1% = 1% × (purchase price + rehab)
- Max all-in cost at 1% = monthly rent ÷ 1%, and max purchase price = that figure − rehab
- 50% rule cash flow = half of the rent − monthly principal and interest. The 50% rule is a second shortcut that assumes operating costs and vacancy take about half the rent.
The table also shows 0.7% and 2%. Some investors use a lower bar where prices are high relative to rents, and 2% is sometimes quoted for lower-priced properties. Neither is official.
Worked example
A house is listed at $180,000, needs $20,000 of work and should rent for $2,100 a month. You would borrow 75% of the price at 7% for 30 years.
| Measure | Result |
|---|---|
| All-in cost | $200,000 |
| Rent-to-price ratio ($2,100 ÷ $200,000) | 1.05%: passes |
| Rent needed for 1% | $2,000/mo |
| Max all-in cost at $2,100 rent | $210,000 |
| Max purchase price after $20,000 rehab | $190,000 |
| Principal and interest on $135,000 at 7% | $898.16/mo |
| 50% rule cash flow ($1,050 − $898.16) | $151.84/mo |
The house passes, but the 50% rule leaves only about $152 a month of margin. If property taxes and insurance in that area are high, or the building is older and needs more repairs, real cash flow could be negative. That is the signal to build a detailed budget.
When the rule misleads you
- High-tax or high-insurance areas. A property can pass 1% and still lose money.
- Expensive markets. Few properties reach 1%, yet some still cash flow with a larger down payment or appreciate strongly. The rule says nothing about appreciation.
- Optimistic rent. Use rents for similar units that actually leased recently, not asking rents.
- Multi-unit buildings. Enter the total rent for all units. Owner-paid utilities in older buildings can be large.
Next steps
If a property passes the screen, build the real numbers with the rental property cash flow calculator, then check the cap rate and your cash-on-cash return. The gross rent multiplier calculator is another quick price-to-rent screen using yearly rent.