The formula
Monthly rent / purchase price >= 1%You can also turn it around to find the rent a price needs:
Rent needed = purchase price x 1%Worked example
Starting numbers from the calculator: price $250,000, rent $2,300 a month.
- Rent / price: $2,300 / $250,000 = 0.92%
- Rent needed for 1%: $250,000 x 1% = $2,500 a month
This property is $200 a month short, so it does not pass. That does not make it a bad deal. With the calculator's other starting numbers (5% vacancy, $9,000 of yearly costs) its cap rate is 6.89%. The 1% rule never looked at those costs.
Why people use it
It filters a long list of listings quickly. If rent is far below 1% of the price, the property may struggle to pay for itself. It is a screen, not an answer.
When it misleads
- It ignores costs. Two properties with the same rent and price can have very different taxes, insurance and repairs.
- It ignores your loan. Rate and down payment change cash flow a lot.
- In expensive areas few deals pass. In cheap areas many pass that still lose money.
- Passing does not mean the deal cash flows. Failing does not mean it does not.
Use it to sort, then check the real figures: cap rate and cash flow.
Try the cap rate and 1% rule calculator to check your own listing.
FAQ
Is the 1% rule a good test?
It is a fast first filter. It is not a test of whether a deal is good.
Which rent should I use?
Use the rent you expect to collect, not the highest number you can find. Check similar rentals nearby.
Does the rule account for my loan?
No. It only compares rent with price. Run the full numbers for cash flow after the loan.