The 1% rule in real estate, and why it's only a rough screen

The rule

Monthly rent ≥ 1% of purchase price (plus any upfront repairs)

A $180,000 house passes if it rents for $1,800 a month or more. A $300,000 house would need $3,000. Some investors include the rehab budget in the price; others use 2% or 0.8% depending on their market. It's the same idea as the gross rent multiplier turned upside down: 1% of price per month is a monthly GRM of 100.

Where the 1% comes from

The rule works as a screen because of how mortgage payments scale with price. At a 7% rate on a 30-year loan with 25% down, principal and interest alone come to about 0.5% of the purchase price every month. Property tax, insurance, maintenance, capital expenses, management and vacancy commonly take another 0.3% to 0.5% of the price a month, depending on the area. Add those together and a property renting for 1% of its price has a chance of breaking even or better; one renting for 0.6% almost certainly won't, with a typical down payment.

That logic depends on interest rates and local costs. When rates are lower, properties below 1% can cash-flow; when they're higher, even 1% may not be enough.

Two houses that both pass

Both houses cost $180,000 and rent for $1,800 a month, so both meet the 1% rule exactly. House A is in a county with low property taxes and moderate insurance. House B is in a high-tax county in a state where insurance is expensive, and it's 60 years old.

$420 a month is close to a quarter of the rent. With 25% down at 7%, House A might clear around $200 a month after the mortgage; House B is likely to lose money. The 1% rule can't tell them apart because it never looks at expenses.

When the rule misleads

• Expensive markets. In many high-cost cities almost nothing meets 1%. Investors there buy for appreciation and accept lower cash flow, a different strategy with different risks, but the rule will reject every listing.
• Cheap properties. Low-priced houses pass easily, but they often come with higher repair costs, more turnover and harder collections. A $70,000 house renting for $1,000 passes at 1.4% and can still be a poor investment.
• Unrealistic rent. The rule is only as good as the rent you plug in. Check it against local benchmarks such as the rent estimator (and read how those estimates work) as well as current listings.

What to do instead

Use the 1% rule to decide which listings deserve five more minutes, then run the real numbers: estimate NOI from actual taxes and insurance quotes, subtract the mortgage at today's rate, and look at cash flow, cash-on-cash return and DSCR. The rental cash flow calculator does all of that and can fill in local rent, tax and rate data for a ZIP code.

Common mistakes

• Treating a pass as a buy signal rather than a reason to look closer.
• Leaving the rehab budget out of the price.
• Using the rent from the listing or a single high comparable.
• Applying a rule built on one interest rate in a very different rate environment.