The 1% Rule in Real Estate, Explained

What the rule says

A property passes the 1% rule if monthly rent is at least 1% of the total purchase price including up-front repairs. A $200,000 property needs $2,000 in monthly rent to pass.

The logic is that at roughly that ratio, rent has historically been high enough to cover the mortgage, taxes, insurance, and reserves with something left over.

Why investors use it as a fast filter

It takes five seconds and needs only two numbers from the listing. Scanning fifty properties, it eliminates the obvious non-starters before you spend real time modeling anything.

It also creates a shared shorthand. When investors say a market is 'a 0.6% market,' they are describing price-to-rent conditions instantly.

Its limitations

The rule was popularized when 30-year mortgages sat near 4%. At 7%, a property at exactly 1% can still be cash-flow negative — the ratio never adjusted for the rate environment.

It also ignores everything that varies by location: property taxes (a 1% property in Texas and one in Indiana are not the same deal), insurance in coastal markets, HOA dues, and management costs.

And it ignores condition. A property hitting 1% because it needs $40,000 of work is not passing anything — the repair budget belongs in the price side of the ratio.

When to ignore it

Ignore it in appreciation-driven metros, where almost nothing hits 1% and investors buy for growth and rent increases over time. Ignore it for short-term rentals, where revenue is a multiple of long-term rent and the ratio is meaningless. Ignore it on BRRRR deals, where the relevant price is your post-refinance basis, not the purchase price.

Use it to sort a list. Then run cap rate and cash-on-cash on anything that survives, because those are the numbers that actually decide whether the deal works.