What it is
The 1% rule is the fastest filter in rental investing, and it exists because most listings are not worth underwriting. Rather than build a full pro forma for every property, an investor asks one question: does the monthly rent reach one percent of everything it costs to own the place ready-to-rent? A property that clears the bar earns a closer look. A property that misses it badly gets skipped without another minute spent. It is a triage tool, not a verdict — the point is to spend your analysis time on the small share of listings that could plausibly work.
How it is calculated
Take the all-in basis — purchase price plus the rehab needed to make the unit rentable — and divide the expected monthly rent by it. A $150,000 all-in property renting for $1,500 hits 1.0%. The same property renting for $1,200 sits at 0.8% and fails. Note that the denominator is all-in, not list price: a $120,000 house that needs $30,000 of work is a $150,000 property for this purpose, and investors who skip the rehab line make cheap distressed listings look far better than they are.
Monthly rent ÷ (purchase price + rehab) × 100. A $130,000 purchase with $20,000 of rehab and $1,500 rent lands at exactly 1.0%.
How investors actually use it
In practice the rule is a sorting mechanism at the top of the funnel. Investors scanning a market set a threshold, keep the listings that clear it, and underwrite only those in detail — checking real taxes, an actual insurance quote, vacancy, management, and the debt service the rule ignores entirely. Many buyers in expensive metros run a 0.7% or 0.8% screen instead, because a strict 1% filter returns nothing there. That adjustment is the right instinct: the number is a local convention, and the useful version of the rule is whatever ratio separates workable deals from hopeless ones in the market you are actually buying in.
The common mistake
Treating a pass as a purchase decision. The 1% rule says nothing about property taxes, which can differ by a factor of three between two states, nor about insurance, which has repriced sharply in coastal and storm-exposed markets — both vary by state, and a professional should price them for your specific property. It ignores the interest rate on your loan, the age of the roof, and the vacancy the neighborhood really runs. Plenty of properties clear 1% and still lose money monthly. Use it to decide what to analyze, then let the full analysis decide what to buy.
Put it to work
Related terms
- 50% rule — A rule of thumb estimating that operating expenses — taxes, insurance, maintenance, vacancy, management, and capex — consume roughly 50% of gross rent over time, excluding the mortgage.
- Cash-on-cash return — Annual pre-tax cash flow divided by the total cash you actually invested — down payment, closing costs, and rehab.
- Cap rate — Capitalization rate — net operating income divided by purchase price, shown as a percent.
- NOI (net operating income) — Annual rental income minus all operating expenses, but before mortgage payments and income taxes.