1% Rule in Commercial Real Estate: What It Is and How to Use It

The 1% rule is a quick check that helps real estate investors figure out if a property could be a good deal. If you haven’t come across it before, here’s the simple version: your property should bring in monthly rent that’s at least 1% of its purchase price. So, if you’re looking at a building selling for $800,000, you’d hope to get $8,000 in rent every single month. That’s the idea—no fancy formulas, just basic math.

This rule gets tossed around a lot in real estate circles because it’s fast. You don’t need spreadsheets or complex number-crunching—just the listing price and realistic rent expectations. Think of it like a first filter. You see a property, run the numbers in your head, and instantly know if it’s even worth digging deeper.

But don’t get too comfortable. The 1% rule is not a golden ticket—plenty of properties that “pass” the rule can still end up being duds. There are more moving parts than just purchase price and rent. So why does everyone keep talking about this rule? Because it saves time. Most commercial property listings aren’t even close to that 1% line, so it’s a fast way to spot stronger options from the rest.

• Breaking Down the 1% Rule
• Why It Matters for Investors
• How to Calculate the 1% Rule
• Common Mistakes and Pitfalls
• Does It Always Work?
• Smart Ways to Use (and Not Use) the 1% Rule

Breaking Down the 1% Rule

The 1% rule is probably the most talked-about quick test in commercial real estate investing. It’s super simple—if the expected monthly rent from a property is at least 1% of the property’s purchase price, investors say it “passes” the rule. For example, let’s say you’re eyeing a retail building priced at $600,000. According to the 1% rule, you want to see at least $6,000 in potential rent every month. If the numbers line up, you might be looking at a possible winner.

Here’s what the basic math looks like in real life:

• Buy price: $600,000
• 1% of price: $6,000
• Target rent: $6,000 or more per month

It only takes a few seconds to run this check. That’s the beauty—no calculators, no long meetings. If a property clears 1%, it jumps to your “worth more research” list. If it doesn’t, you move on, saving yourself time and hassle.

The 1% rule actually grew out of old rental real estate investing advice (mostly in the apartment and single-family world) before it found its way into the commercial side around the early 2000s. Today, a lot of investors rely on this rule as a first step when looking at all sorts of properties, from strip malls to small office buildings.

But here’s a fun fact: a survey done in 2023 across several U.S. cities found that fewer than 10% of listed commercial properties actually meet the 1% rule benchmark. The numbers can shift a lot by region:

What does that tell you? Properties that pass the rule are rare, so when you spot one, you probably want to take a closer look—but never skip doing deeper research.

Why It Matters for Investors

If you’re swimming in property listings, the last thing you want is to spend hours crunching complex numbers just to figure out if a deal’s worth your time. That’s why the 1% rule is a fan favorite among commercial real estate folks. It’s like having a filter for your search—you use it to cut out the deals that just don’t make sense on paper.

Here’s the deal: commercial properties are serious investments, often costing several hundred thousand to millions. If the rent can’t cover your mortgage, taxes, insurance, and still leave you some profit, it’s a quick "no." The 1% rule lets you spot those red flags instantly. Without this kind of shortcut, beginners and pros alike can waste money and time on properties that never had a chance to work out in the first place.

In hot real estate markets, it’s common to see properties where the numbers come nowhere close to this rule. That should raise eyebrows—maybe you’re looking in a spot where rents are lagging behind prices, or maybe the market’s overheated. Either way, it’s a warning that you might not get the returns you’re after.

For investors juggling multiple deals or looking at out-of-town properties, the rule becomes even more helpful. It helps you stay objective and resist the urge to take on risky deals just because a property looks good at first glance. Those fast checks might keep you from making expensive mistakes.

Don’t forget—it’s just a starting point. Smart investors use the 1% rule as an initial pass, but they always dig deeper before making an offer. Relying on this rule alone? That’s asking for trouble, but using it as your first filter can save you headaches later on.

How to Calculate the 1% Rule

Calculating the 1% rule for commercial real estate is super straightforward, and you don’t need to be a math whiz to do it. Here’s what you do: simply multiply the property’s asking price by 1%. The answer is the minimum monthly rent you’d want the property to generate to clear that first hurdle.

Let’s break it down with a real example. Imagine a small strip mall listed at $1,200,000. Multiply $1,200,000 by 1% (just move the decimal two places left), and you get $12,000. So if that property earns at least $12,000 per month in rent, it passes the basic filter.

Here’s what this often looks like in practice:

• Find the asking or purchase price (say, $500,000)
• Multiply by 1% (0.01 x $500,000 = $5,000)
• Compare $5,000 to the actual or projected total monthly rent

If the monthly rent is $5,000 or more, the property fits the rule. If not, it flunks right out of the gate.

To make things even clearer, check out this simple table of common price points and their 1% rental targets:

If the monthly rent is way lower than that 1% target, you’re probably not looking at the kind of cash flow most investors want.

One thing people often skip: you want to use the total rent from all leases in the building, not just one tenant. If the property isn’t full, use numbers based on market rents for those empty spaces. Better to estimate than guess and end up surprised later.

It’s also smart to check whether that rent number includes extra fees tenants pay (like maintenance or property taxes in triple net leases). For a quick scan, stick to base rent. Later, when you’re serious about a deal, dig deeper into all those costs.

Common Mistakes and Pitfalls

The 1% rule sounds simple, but it trips up newbies all the time. The most common mistake? Folks forget that it’s just a screening tool—not a promise of profit. Real returns depend on way more than a quick ratio. Here’s where things go off the rails.

• Ignoring Expenses: People focus so much on rental income that they ignore expenses like property taxes, insurance, repairs, and management fees. Just because the rent hits 1% doesn’t mean anything if half of it disappears in bills every month.
• Overestimating Rent: Getting rent numbers wrong kills deals. Sometimes owners use wishful thinking or top-dollar rents that nobody will actually pay. To really use the rule, you’ve got to be honest about what tenants will pay based on actual market rates.
• Forgetting Vacancy Rates: Most commercial properties aren’t full 100% of the time. Even one or two months of empty units can ruin your numbers for the year. Always figure in the local vacancy rate, or the 1% “win” could be a total fluke.
• Assuming It Works Everywhere: In red-hot markets like Manhattan or downtown San Francisco, good luck finding any property that actually fits the 1% rule. High-demand cities often fall below this mark, while cheaper or struggling markets might go way above. The rule is a rough filter, not a hard standard.

Check out how expenses alone can eat into your returns, even if a property passes the 1% rule:

Same building. Same rent. But if expenses are higher, you keep a lot less. This is why investors always dig past the 1% snapshot. First check with the rule, then put everything under a microscope before you buy.

Does It Always Work?

The truth is, the 1% rule doesn’t always fit every deal in commercial real estate. It’s a nice shortcut for screening properties, but you have to know when it falls short. One big problem? Commercial rent values and property prices can be all over the place depending on the building type, the local market, and what’s happening in the economy. A strip mall in a trendy city block might pull in way more than 1% each month, while an office complex in a slow market might not even come close.

Another catch is that the 1% rule doesn’t look at expenses. Commercial buildings often have sky-high costs—like taxes, insurance, repairs, utilities, and management fees. So a property might ‘pass’ the rule but barely make any profit after you pay the bills. That’s why experienced investors always dig deeper than this rule before putting down cash.

It also falls flat in high-priced areas. Take downtown San Francisco or central London—properties there almost never meet the rule. If you held out for 1% every time, you’d watch all the good deals pass by. In some tight markets, getting even half a percent cash flow is the norm. It’s not that the deals are bad—it’s just the local math works differently.

So, does the 1% rule ever work perfectly? Mostly in lower-priced areas with less competition, like smaller cities or places with lots of available commercial space. That’s where rents can actually keep up with (or beat) property prices. But once you get into hot metro markets or specialized buildings like medical offices or industrial warehouses, the numbers can look very different. Always treat the 1% rule as a quick filter, not the final answer.

Smart Ways to Use (and Not Use) the 1% Rule

Here's the truth—treating the 1% rule like a rigid law will get you in trouble. It's a screening tool, not a decision-maker. The rule gives you speed, and that's its strongest superpower. But relying on it for every step is like using a pocketknife when you really need power tools.

Want to use the 1% rule smartly? Follow these steps:

• Start With the Numbers: Use the 1% rule as a first filter when checking out lots of listings. It helps you avoid wasting time analyzing properties that won’t cut it on cash flow.
• Research the Local Market: In high-demand cities or areas with expensive commercial property, hitting 1% is rare. For example, New York or San Francisco commercial spots barely come close, while small cities in the Midwest can sometimes do better.
• Dig into Actual Expenses: Some properties that hit the 1% look great on paper but have huge expenses—taxes, insurance, maintenance, or terrible vacancy rates.
• Tweak the Rule for Bigger Deals: For large commercial buildings, the 1% standard sometimes gets too high because rents don’t scale perfectly with price. It’s still decent for quick filtering but always double-check with deeper math.
• Check the Cap Rate: Always bring in cap rate analysis once a property passes the 1% rule. That’ll give you a more accurate picture of real returns.

There are also clear situations where the 1% rule can mess you up. Watch out for:

• Ignore locations where market rent is way below the rule—it’s pointless to expect miracles in an overpriced zone.
• Skipping a full expense breakdown—one surprise roof repair and your 1% advantage vanishes.
• Assuming you’ll always collect full rent—vacancy rates and non-paying tenants happen more than you think.

Here’s a comparison table showing how different cities stack up when it comes to the 1% rule:

If you stick to the 1% rule without backup, you’ll miss out on good deals in hot markets or waste time analyzing mediocre properties elsewhere. Use it to save time, but don’t let it replace proper due diligence. Look at local numbers, double-check for surprise costs, and always run the full calculations before you buy. The 1% rule is just your first gut check—don’t stop there.