1% Rule: Definition and Formula

The rule

Monthly rent / Purchase price >= 1%

A US$150,000 house needs to rent for US$1,500 a month or more to pass. A US$200,000 house needs US$2,000.

It's a screen for deciding which listings deserve a closer look. It takes five seconds and needs no assumptions about expenses.

Why 1%

The idea is that at 1%, the rent is likely to cover the mortgage, tax, insurance and upkeep with something left over. That worked well when interest rates were low. At today's rates, a property at exactly 1% often falls short once real costs are counted.

An example

A house is listed at US$120,000 and the rent estimate is US$1,300. The ratio is 1,300 / 120,000, or 1.08%. It passes, so you'd run the full numbers.

A second house is listed at US$300,000 with a US$2,100 rent. That's 0.7%. It fails, and unless something special is going on, you'd skip it.

Where it fits

Pass rates differ by city. Markets in the Midwest and Southeast produce 1% listings regularly, while most coastal cities don't. Our markets page shows each tracked city's median rent-to-price ratio, so you can see where the rule is realistic.

What it can't tell you

• Expenses. Property taxes vary from about 0.4% to over 2% of value. Two houses at 1% can have very different cash flow.
• Financing. It ignores your rate and down payment.
• Condition. A cheap house with a failing roof passes the rule and loses money.

That's why it's a first filter. Cap rate and cash-on-cash return come next.

Related reading

The 1% rule explained post covers where the rule breaks down. For a similar quick screen, see the good cap rate guide.