The 1% rule is the fastest way to screen rental properties. In seconds, you can determine if a deal is worth investigating further—or if you should move on.

But like all rules of thumb, it has limitations. Here's how to use it effectively and when to dig deeper.

What is the 1% Rule?

The 1% rule states that a rental property's monthly rent should be at least 1% of the purchase price.

1% Rule: Monthly Rent ≥ 1% of Purchase Price

Or rearranged:

Purchase Price ≤ 100× Monthly Rent

Examples

Passes the 1% rule:

• Purchase price: $200,000
• Monthly rent: $2,200 (1.1%)
• ✓ Rent is above 1% of price

Fails the 1% rule:

• Purchase price: $400,000
• Monthly rent: $2,800 (0.7%)
• ✗ Rent is below 1% of price

Why 1%?

The 1% threshold exists because, historically, properties meeting this benchmark tend to generate positive cash flow after accounting for:

• Mortgage payments
• Property taxes
• Insurance
• Maintenance
• Vacancy
• Property management

Properties below 1% often struggle to cash flow, especially with financing. Properties above 1% typically have cushion.

It's not a guarantee—just a quick filter.

The Math Behind the Rule

Let's see why 1% works as a rough threshold.

Property: $200,000 purchase, $2,000/month rent (1%)

Income:

• Monthly rent: $2,000
• Annual rent: $24,000
• Less 5% vacancy: -$1,200
• Effective income: $22,800

Expenses (typical for SFR):

• Property taxes (1.25%): $2,500
• Insurance: $1,200
• Maintenance (1%): $2,000
• Property management (8%): $1,824
• CapEx reserve: $1,200
• Total expenses: $8,724

NOI: $22,800 - $8,724 = $14,076

Debt service (75% LTV, 7%, 30yr):

• Loan: $150,000
• Monthly payment: $998
• Annual: $11,976

Cash flow: $14,076 - $11,976 = $2,100/year ($175/month)

At exactly 1%, the property barely cash flows. Below 1%, you're likely negative. Above 1%, you have more cushion.

The 2% Rule and Other Variations

Some investors use stricter or looser versions:

The 2% rule is much stricter—very few properties in major metros hit 2%. It's more realistic in:

• Low-cost Midwest cities
• C-class neighborhoods
• Value-add situations (after renovation)

Don't expect 2% in San Francisco or Austin. You might find it in Cleveland or Memphis.

Where You Can Find 1% Properties

Properties meeting the 1% rule are increasingly rare in many markets. You're more likely to find them in:

Geographic areas:

• Midwest (Indianapolis, Cleveland, Detroit, St. Louis)
• Southern secondary markets (Birmingham, Memphis, Little Rock)
• Rust Belt cities
• Small towns and rural areas

Property types:

• C-class multifamily
• Older single-family homes
• Value-add opportunities (buy below market, renovate)
• Off-market deals

What you won't find at 1%:

• Coastal cities (SF, LA, NYC, Boston, Seattle)
• Hot growth markets (Austin, Nashville, Denver)
• Class A properties anywhere
• New construction

The tradeoff: markets with 1%+ properties often have lower appreciation, higher management intensity, and tenant quality challenges.

Limitations of the 1% Rule

1. Ignores Property Condition

A $100,000 property renting for $1,200/month (1.2%) looks great—until you discover it needs a $30,000 roof. The effective purchase price is $130,000, dropping the ratio to 0.92%.

Always factor in repair costs.

2. Ignores Market Rent Accuracy

Sellers often quote optimistic rents. Verify actual market rent through:

• Comparable rentals on Zillow/Rentometer
• Property manager input
• Actual rent roll (for occupied properties)

A property "meeting" the 1% rule on inflated rents doesn't actually meet it.

3. Ignores Appreciation

Low-cost markets with high rent ratios often have minimal appreciation. A 1.5% property in a declining market might underperform a 0.7% property in a growing market when you factor in equity growth.

4. Ignores Expense Variations

Property taxes range from 0.5% (Hawaii) to 2.5% (New Jersey, Texas). Insurance varies wildly. A 1% property in Texas with 2.5% taxes performs very differently than one in Tennessee with 0.7% taxes.

5. Ignores Financing

The 1% rule assumes you can get financing. If interest rates are 8% instead of 5%, your debt service increases significantly—and 1% might not be enough.

Using the 1% Rule Correctly

Step 1: Quick Screen

Browse listings and calculate: Rent ÷ Price × 100

• Above 1%: Investigate further
• Below 0.8%: Probably skip (unless appreciation play)
• 0.8%-1%: Marginal; depends on specifics

Step 2: Adjust for Actual Costs

If it passes initial screening:

• Get real rent comps
• Estimate actual expenses for that market
• Factor in any needed repairs

Step 3: Run Full Analysis

Calculate actual cash flow, cap rate, and cash-on-cash return. The 1% rule is a filter, not a final decision.

Step 4: Consider Total Return

A 0.7% property in a market appreciating 5%/year might beat a 1.3% property in a flat market. Cash flow isn't everything.

When to Break the Rule

Accept below 1% when:

• Strong appreciation expected
• You're buying for long-term wealth building
• The property is in a premium location with tenant stability
• You have low-cost financing locked in
• It's a primary residence you'll later rent

Require above 1% when:

• You need cash flow immediately
• Market has limited appreciation potential
• Property is management-intensive (C-class)
• You're financing at high rates
• You're investing remotely

Alternative Quick Metrics

If the 1% rule doesn't work for your market, try:

Gross Rent Multiplier (GRM):

GRM = Price ÷ Annual Rent

• GRM under 8 = potential cash flow
• GRM 8-12 = depends on expenses
• GRM over 12 = likely appreciation play

(Note: 1% rule = GRM of 8.3)

Price per Unit (Multifamily):

Compare price per door to market norms. A 4-plex at $75,000/door might be reasonable even if it doesn't hit 1%.

Cap Rate:

Ultimately more accurate than 1% rule because it accounts for actual expenses.

Key Takeaways

• 1% rule: Monthly rent should be at least 1% of purchase price
• It's a quick screening tool, not a final analysis
• Properties meeting 1% tend to cash flow; below 1% often don't
• The rule ignores property condition, market, expenses, and appreciation
• Fewer properties meet 1% in today's market—especially in growth areas
• Use it to filter quickly, then run full analysis on promising deals
• Consider the tradeoff: high rent ratio often means low appreciation

The 1% rule is a starting point, not a strategy. It helps you avoid wasting time on deals that obviously won't work. But the properties that build real wealth require deeper analysis than any single rule can provide.