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

Ever hear someone say a rental property should earn at least 1% of its purchase price each month? That’s the 1% rule in plain English. It’s a fast way to tell if a deal might make money without digging through spreadsheets.

All you need is the asking price and the expected monthly rent. Divide the rent by the price, then multiply by 100. If the result hits 1% or more, the property passes the test. If it’s lower, you might need to look closer or walk away.

How the 1% Rule Works

Let’s say you find a house listed for $150,000. The landlord wants $1,800 a month in rent. $1,800 ÷ $150,000 = 0.012, or 1.2% when you multiply by 100. That clears the 1% hurdle, so on paper the cash flow looks good.

But the rule isn’t a guarantee. It ignores taxes, insurance, maintenance, vacancy, and management fees. Think of it as a first‑screen. If a property clears the 1% rule, you still have to run a detailed cash‑flow analysis.

Why does this rule matter? Real‑estate investors often have limited time to look at dozens of listings. A quick 1% check helps you filter out low‑return deals fast, so you can focus on the ones that might actually earn you cash.

When the Rule Holds Up – Real‑World Tips

In high‑cost cities like New York or San Francisco, hitting 1% is rare because prices are high and rents are capped. In those markets, investors use a lower benchmark, like 0.5%, and rely on appreciation or tax breaks.

In cheaper regions—mid‑west towns, secondary markets, or suburbs—1% deals show up more often. Look for properties that need minor cosmetic fixes. A quick paint job or new flooring can push rent higher without major expense.

Don’t forget vacancy. If you expect your unit to sit empty for a month each year, subtract that rent from your annual income before checking the 1% math.

Management fees can eat profit too. If you hire a property manager, add roughly 10% of rent to your costs. Adjust the rent needed to meet the 1% rule accordingly.

Finally, compare the rule to your own cash‑flow goals. Some investors aim for a 2% or 3% net return after all expenses. Use the 1% rule as a starting line, not the finish line.Bottom line: the 1% rule is a quick sanity check. It helps you skip obvious losers and zero in on rentals that could earn you steady cash. Run the simple calculation, then dive deeper into expenses, taxes, and local market trends before signing any contract.