1% Rule
The 1% rule says monthly rent should equal at least 1% of the purchase price. A $150,000 property should rent for at least $1,500/month. If rent is below that threshold, the property is unlikely to produce positive cash flow with a typical 25% down conventional mortgage.
It is a 15-second screening tool — not a buying decision.
The formula
Or equivalently: Required rent = Purchase price × 0.01
| Purchase price | Minimum rent to pass 1% rule |
|---|---|
| $100,000 | $1,000/month |
| $150,000 | $1,500/month |
| $200,000 | $2,000/month |
| $300,000 | $3,000/month |
| $400,000 | $4,000/month |
Why 1%?
The rule is calibrated to produce neutral-to-positive cash flow under typical leverage assumptions:
- 25% down, 30-year fixed at ~6–7%
- Vacancy at 8%
- Expenses at roughly 40–45% of gross rent
When rent = 1% of price, the math roughly works. When rent = 0.6% of price, it almost certainly does not — vacancy and expenses consume the difference before you get to the mortgage.
Worked example
Property A — Passes:
- Purchase price: $160,000
- Monthly rent: $1,800
- Rent-to-price ratio: $1,800 ÷ $160,000 = 1.13%
- Passes — and leaves cushion above the threshold
Property B — Borderline:
- Purchase price: $220,000
- Monthly rent: $1,800
- Rent-to-price ratio: $1,800 ÷ $220,000 = 0.82%
- Fails the 1% rule
| Property | Price | Rent | Ratio | 1% rule | Worth underwriting? |
|---|---|---|---|---|---|
| A | $160,000 | $1,800 | 1.13% | Pass | Yes |
| B | $220,000 | $1,800 | 0.82% | Fail | Likely no — verify |
| C | $250,000 | $2,200 | 0.88% | Fail | Likely no |
| D | $120,000 | $1,400 | 1.17% | Pass | Yes |
When the 1% rule breaks down
The 1% rule was calibrated for ~4–6% interest rates and moderately priced markets. In today's environment, it may not be sufficient:
| Situation | Why 1% may not be enough |
|---|---|
| Higher interest rates (7%+) | Debt service consumes more of the income; need 1.1–1.2%+ to cash flow |
| High property taxes | Some metros have 2.5%+ annual property tax rates that eat into NOI |
| High-cost markets | In coastal metros, 1% is nearly impossible — locals accept 0.4–0.6% and bet on appreciation |
| Older, high-maintenance properties | Higher maintenance and reserve requirements reduce effective cash flow |
What the 1% rule does not tell you
| Factor | Not captured by 1% rule |
|---|---|
| Actual expenses | Taxes, insurance, and management vary by market |
| Financing terms | Assumes conventional leverage; cash buyers have a different math |
| Vacancy rate | Market-specific; a tight market might justify 0.9% |
| Appreciation potential | 1% deals in flat markets may underperform 0.7% deals in growth markets |
Common mistakes
1. Using the 1% rule as a buying decision. The rule tells you whether to spend time underwriting — not whether to buy. A property that passes the 1% rule still needs a full pro forma.
2. Using asking rent instead of market rent. If the property is currently vacant or overpriced, the current rent is not market rent. Verify with rental comps.
3. Ignoring renovation costs. If the property needs $40,000 in repairs before it can rent for $1,800, include those costs in the "price" for the 1% calculation: ($160,000 + $40,000) = $200,000 all-in → need $2,000/month to pass.
4. Treating 1% as optimal. The 1% rule is a floor, not a target. Better deals show 1.2–1.5%+ ratios in cash-flow markets.
Frequently asked questions
Does the 1% rule still work in 2025? As a screening heuristic, yes — with a caveat that in higher interest rate environments, a true 1% ratio may produce only breakeven cash flow rather than positive. Some investors now target 1.1–1.2% as their filter.
Why do cash flow markets hit the 1% rule and growth markets do not? Rents are set by local incomes and housing demand. Property prices reflect both rent potential AND future appreciation expectations. In high-growth markets, investors pay a premium for appreciation, accepting lower current yields. The 1% rule captures rent yield, not total return.
Is there a 2% rule? Yes — some investors use a 2% rule in cash-flow-heavy markets. A property at 2% ratio produces strong cash flow even under high expenses and vacancy. In most U.S. markets, 2% deals are rare and often indicate distress, high crime, or significant management challenges.
The 1% rule is a screening heuristic, not investment advice. Always perform full underwriting before making a purchase decision.