1% Rule

What Is the 1% Rule?

The 1% rule is a back-of-the-napkin screening tool that helps investors quickly identify properties with potential for positive cash flow. The rule states that a property's gross monthly rent should be at least 1% of its total acquisition cost (purchase price plus any immediate repairs). If a property costs $200,000 all-in and rents for $2,000 per month, it meets the 1% rule. If it only rents for $1,500, it fails and is unlikely to cash flow positively with conventional financing. The rule is not a substitute for detailed analysis, but it eliminates obviously overpriced properties in seconds.

Using the 1% Rule as a Screening Filter

When you are scanning dozens of listings on Zillow or the MLS, you do not have time to build a full pro forma on every property. The 1% rule lets you instantly sort properties into "worth analyzing further" and "skip." Pull up the listing price, estimate market rent from Rentometer or comparable listings, and divide. If monthly rent divided by purchase price equals 0.01 or higher, the property passes the screen and merits a deeper look. If it falls below 0.7%, move on — the math almost never works for cash flow investors at that ratio regardless of how favorable the financing.

Example Calculation

Consider a duplex listed at $250,000 where each unit rents for $1,300 per month, yielding $2,600 in gross monthly rent. The ratio is $2,600 / $250,000 = 1.04% — it passes the 1% rule. Now consider a single-family home listed at $350,000 that rents for $2,200 per month. The ratio is $2,200 / $350,000 = 0.63% — it fails significantly. Even with a modest down payment and favorable interest rate, the single-family home is very unlikely to produce positive monthly cash flow after accounting for taxes, insurance, maintenance, and vacancy.

Limitations and Market Reality

The 1% rule has become increasingly difficult to achieve in many U.S. markets. In high-cost cities like San Francisco, Seattle, or Austin, rent-to-price ratios of 0.4–0.6% are common, and properties that meet the 1% rule may only exist in lower-quality neighborhoods with higher management intensity. The rule also fails to account for significant variations in property taxes, insurance costs, and HOA fees across markets. A property at 1% in Texas (where property taxes can reach 2.5% of value) will cash flow very differently than a 1% property in Alabama (where taxes might be 0.5%). Always follow the 1% screen with a full expense analysis.

The 2% Rule for Aggressive Investors

Some investors use a stricter 2% rule — requiring monthly rent to equal 2% of purchase price. A $100,000 property would need to generate $2,000 per month. Properties that meet the 2% rule are rare and typically found in lower-income neighborhoods of Midwest and Southern cities. While the cash flow numbers look spectacular on paper, 2% properties often come with higher vacancy rates, more tenant turnover, greater maintenance demands, and more management headaches. The higher rent-to-price ratio compensates for higher risk and operating costs.

Practical Application

Use the 1% rule as your first filter but never your final analysis. Properties passing the 1% screen should then be evaluated with a full cash flow analysis including realistic vacancy (5–10%), property management (8–10% of rent), maintenance (8–10%), capital expenditure reserves (5–8%), property taxes, insurance, and debt service. A property at 1.1% might still cash flow negatively if it has high taxes and insurance, while a property at 0.9% might work with below-market financing or strong appreciation potential. The rule is a starting point, not a destination.