2026-08-29
The 1% Rule for Rental Properties, Explained
The 1% rule shows up in almost every beginner's guide to rental investing. It's useful for exactly one thing: deciding whether a listing is worth a second look. It's not a substitute for real math.
The rule itself
Monthly rent should be at least 1% of the purchase price.
A $200,000 property should rent for roughly $2,000 a month or more to pass. A $300,000 property needs about $3,000 a month.
Why people use it
It's fast. You don't need a calculator, a mortgage rate, or a list of expenses to check it. You can eyeball a listing, know the area's typical rent, and rule out properties in about ten seconds. That's the entire value of the rule: speed, at the cost of accuracy.
What it doesn't account for
The 1% rule ignores property taxes, insurance, maintenance, vacancy, management, and your actual financing terms. Two properties can both pass the 1% rule and have completely different cash flow, because one sits in a high-tax county and the other doesn't, or one needs a new roof in two years and the other doesn't.
It also doesn't adjust for interest rates. The rule became popular when mortgage rates were much lower than they are now. At a higher rate, a property that clears 1% can still have negative cash flow once you run the real numbers.
What "clearing 1%" actually looks like once you finance it
Here's the gap in concrete terms. A $300,000 property renting at exactly $3,000/month clears the 1% rule with nothing to spare. Run it through real numbers, 20% down, a 7% rate, and typical operating expenses eating about 45% of rent:
Gross rent: $36,000/year (exactly 1% of price)
NOI after operating exp.: $19,800/year
Mortgage payment (7%): $19,161/year
Cash flow: $639/year
Cash-on-cash return: 1.0%
A property that "passed" the 1% rule lands at roughly break-even cash flow once financed. That's not a bad property, and it's not a failure of the rule, either. It's exactly what the rule was always meant to do: get a listing onto your shortlist, not confirm it belongs in your portfolio. The 1% rule was popularized when rates were much lower; at 7%+, "passing" and "actually cash flows" have drifted apart.
Where it still works
Use it as a first filter, nothing more. If a listing doesn't come close to 1%, it's probably not worth the time to run the full numbers. If it does clear 1%, that's your cue to actually do the math: real taxes, real insurance, a real financing scenario, an honest vacancy and maintenance allowance. Passing the 1% rule gets a property onto your shortlist. It doesn't get it into your portfolio.
What replaces it
Cash-on-cash return and cap rate, run with your property's actual expenses and your actual financing. That's slower to calculate by hand, which is exactly why most first-time investors skip it and lean on shortcuts like the 1% rule instead. The real numbers are the only ones that tell you what actually lands in your account each month.
That's the full calculation we run on every listing, every night. No shortcut, no rule of thumb standing in for the real math.
Stop running these numbers by hand.
Prop Hound checks every new listing in your market every night. You only see the ones worth a second look.