The 1% Rule for Rental Properties: How It Works and Where It Falls Short
The 1% rule is a quick screen some landlords use before running full numbers on a rental. It asks one question: is the monthly rent at least 1% of the purchase price?
The formula
Passes the rule if the ratio is at least your rule % (1% by default)
Highest price that meets the rule = monthly rent ÷ rule %
This is exactly how the Rental Deal Analyzer computes it. Two details: it uses monthly rent for all units only (other income such as parking or laundry is not included), and the 1% is a setting you can change, for example to 0.8% or 1.2%, to match your own standard.
Worked example
Example only: made-up round numbers, not a real property or market. Purchase price $200,000; monthly rent $1,800 (no other income); closing costs $6,000; upfront repairs $4,000; 20% down; 7% interest, 30-year loan; 5% vacancy; property tax $2,400/yr; insurance $1,200/yr; no HOA or owner-paid utilities; maintenance 8% and CapEx reserve 5% of rent; self-managed (0%).
- Rent-to-price: $1,800 ÷ $200,000 = 0.009 = 0.90%
- 0.90% is below 1%, so this example does not pass the 1% rule.
- Highest price that meets 1%: $1,800 ÷ 0.01 = $180,000
Where the 1% rule falls short
- It ignores expenses. Property tax, insurance, HOA dues, utilities, maintenance and management can differ a lot between two homes with the same rent and price.
- It ignores financing. Your interest rate, down payment and loan term drive your mortgage payment and cash flow; the rule does not look at them.
- It ignores upfront cash. Closing costs and repairs change how much you put in, which matters for cash-on-cash return.
- It ignores vacancy. Rent you don't collect isn't in the ratio.
- Failing doesn't mean a bad deal, and passing doesn't mean a good one. It is a filter for deciding which listings deserve a full analysis.
In the example, the full numbers (worked through in Cap Rate vs. Cash-on-Cash Return) give a 7.06% cap rate and a 2.68% cash-on-cash return. The rule alone tells you none of that. In the Analyzer, the 1% check sits on its own row and is not part of the verdict, which compares cash-on-cash, DSCR and cap rate against your targets.
Not investment advice. These are estimates that depend entirely on the numbers you enter. Check figures with your lender and a qualified professional before you buy. Not legal or tax advice; rules vary by state and city.