1% rule in real estate: What rental investors should know

Imagine you’ve decided to start investing in real estate. You’re hoping to buy a rental property, but you’re worried about failing to generate an income or winding up underwater. All investors need to be able to run the numbers before making a deal to calculate whether they can cover their expenses and turn a profit.

The 1% rule¹ is a popular rule of thumb that can give investors an idea of whether they can earn a return on investment in a rental property. The rule says that for a property to produce a return, it needs to rent for 1% of its purchase price each month plus any necessary immediate repairs.

Here’s a closer look at how the 1% rule works, how to use it, and other ways to decide if a real estate investment may be a good opportunity.

Key takeaways:

• The 1% rule is a quick rental screening tool: The 1% rule suggests that a rental property’s monthly rent should equal at least 1% of its purchase price to potentially generate positive cash flow.
• It’s a starting point, not a guarantee: While useful for fast comparisons, the 1% rule doesn’t account for expenses like repairs, vacancies, property taxes, insurance, or financing costs.
• Market conditions affect its usefulness: In higher‑cost or competitive markets, meeting the 1% rule may be difficult, so investors often rely on more detailed cash‑flow and return analyses.

What is the 1% rule in real estate?

The 1% rule is a popular rule of thumb that real estate investors use to decide whether a property might be a good investment opportunity. It suggests that for a real estate investment to succeed, the investor needs to be able to charge 1% of the home’s price for monthly rent.

Keep in mind that you should also account for the cost of repairs and renovations when doing this calculation.

This rule is popular for several reasons, including that it’s easy to use to get an idea of how much you’d need to charge in rent, and it’s a good safeguard against not being able to cover your mortgage payment.

Many investors use it as a pre-screening tool to focus their search for rental properties. For example, if you know that homes in a neighborhood rent for about $1,100, you probably want to pass on a nearby property selling for $150,000.

Some investors go more conservative and use the 2% rule, aiming to charge 2% of the home’s purchase price in rent.

What the 1% rule is actually for

Investors use the 1% rule as a time-saving filter during early property searches. When scanning dozens of Multiple Listing Service (MLS) listings or turnkey properties, running a quick 1% calculation helps investors narrow down which properties warrant a full underwriting review.

Passing the 1% rule does not guarantee a profitable investment or positive cash flow, but it simply indicates that the property is worth a closer look.

How to calculate the 1% rule

The calculation should include the purchase price and immediate repair or renovation costs rather than the listing price alone.

1% rule formula

Target Monthly Rent = (Purchase Price + Immediate Renovation Costs x 0.01)

Example of the 1% rule

Here’s an example of how the 1% rule works.

Imagine you’re hoping to buy an investment property. You find a home selling for $270,000. It does not need any major renovations or repairs.

According to the 1% rule, this may be a profitable investment if you can charge 1% of the home’s price for rent each month. $270,000 x 0.01 = $2,700, so you would typically need to charge $2,700 per month in rent to make a profit.

You look at nearby properties and see that they’re advertised for rent at $2,900 a month. Because that more than meets the 1% rule, you can feel relatively confident that this is a good investment opportunity.

Common calculation mistakes

Here are some common missteps investors use when calculating the 1% rule:

• Using asking price instead of total cost: Forgetting to add immediate repair costs understates the true baseline rent required.
• Relying on seller projections: Using hypothetical “pro forma” rent claims provided by the seller rather than verified local market comps.
• Confusing gross rent with net profit: Assuming that a property meeting the 1% target will automatically produce monthly profit without calculating operating expenses.

What the 1% rule leaves out

It’s important to keep in mind that the 1% rule is only a rule of thumb. It is not a guarantee of profit, and it does not account for a number of factors that influence the success of a real estate investment, including property taxes, insurance costs, property management fees, or maintenance costs.

It also ignores your mortgage’s interest rate. Lower rates mean lower monthly mortgage payments, so you can charge a lower rent while still turning a profit. A higher rate would mean you’d have to charge more to earn a profit.

You should also be aware of potential problems when purchasing an investment property in the most expensive cities, where homes are pricey, but the average rent is much lower than 1% of the typical purchase price.

For example, the median list price for a home in San Francisco is about $1.6 million. Using the 1% rule, you should charge $16,000 as your minimum monthly rent.

Despite this, the average rent in San Francisco is close to $3,800 per month. To match the 1% rule to the median rent in San Francisco, you’d need to find a $380,000 property, and that’s only a quarter of the median list price in the city.

Operating expenses

Two properties costing $200,000 each and renting for $2,000 per month can both pass the 1% rule. However, their actual profitability can vary wildly depending on operating costs:

• Property taxes: A home in a high-property-tax state like New Jersey or Texas incurs far higher monthly expenses than an identical home in a low-tax state.
• HOA fees: Mandatory homeowners association dues directly reduce net income.
• Insurance costs: Landlord insurance premiums vary significantly based on flood zones, local weather risk, and building age.
• Maintenance & vacancy reserves: Older homes require higher ongoing maintenance allowances than newer constructions.

Financing costs

The 1% rule does not consider how you finance the purchase. A cash buyer, a buyer securing a 15-year mortgage at a higher rate, and an investor putting 25% down on a 30-year fixed loan will experience vastly different monthly debt payments on the exact same property.²

Does the 1% rule still work?

There’s a valid reason to question if the 1% rule is still valid and realistic in today’s market. The rule may still be useful as an initial filter, but its usefulness depends on local rent levels, property prices, and the investor’s strategy.

When the 1% rule may work

The 1% rule remains an effective screening metric in markets where rents compare favorably with property prices – like in secondary and tertiary Midwest and Southern housing markets. In cash-flow-heavy markets, hitting or exceeding 1% gross monthly rent is a realistic filter for build-to-rent or value-add single-family homes.

When to ignore the 1% rule

The 1% rule has gotten more challenging to hit because home prices have climbed faster than rents in recent years. Here are some cases where the 1% rule may not be realistic:

• High-cost appreciation markets: In expensive metro areas like California and New York, median home prices exceed median rents. Investors in these markets focus on equity growth, property appreciation, and tax benefits rather than strict 1% cash flow.
• Short-term and vacation rentals: Short-term rentals generate fluctuating nightly rates and higher management costs, making static monthly 1% calculations inapplicable.
• BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat): Investors executing value-add rehab projects evaluate post-renovation equity and debt service coverage ratios (DSCR) rather than pre-rehab purchase ratios.

Other real estate investment metrics to consider

The 1% rule is a popular rule of thumb for analyzing real estate investment profitability, but it’s not the only one. Many investors use other metrics when buying rental properties.

Gross rent multiplier

Gross rent multiplier (GRM) is another metric that investors use to screen for good real estate investment opportunities. The GRM of a property is the ratio of a property’s market value compared to the annual gross rent it produces.

For example, if a home is worth $400,000 and it produces $26,500 in rent each year, its GRM is:

$400,000 / $26,500 = 15.09

The GRM reflects how many years you’d need to rent the home out to earn as much money as you’d get from selling it. Note that this is different from how long it would take to pay the home off, because GRM doesn’t account for operating costs.

There isn’t a single rule for what makes a good GRM, but in many places, a score between about 4 and 7 is a good deal. Instead, it’s useful for comparing different properties in the same market. The lower the GRM, the more income a property produces compared to its value, and the better it is as an investment.

2% and 50% rules

The 2% rule uses a higher rent-to-price target, while the 50% rule estimates that a portion of rental income may go toward operating expenses:

• 2% rule: A stricter variation of the 1% rule stating that monthly rent should equal 2% of the purchase price. This is more common in low-cost, high-risk markets.
• 50% rule: A rule of thumb estimating that roughly 50% of gross rental income will be spent on operating expenses over time – excluding mortgage principal and interest.

DSCR

Mortgage lenders offering investment property loans evaluate the DSCR to confirm that property revenues support mortgage payments.

DSCR = Net Operating Income (NOI) / Annual Debt Principal & Interest Payments

Lenders generally look for a DSCR of 1.20x to 1.25x or higher. This means the property generates 20% to 25% more net income than required for debt service.

Cap rate and cash-on-cash return

Capitalization rate (cap rate) measures intrinsic property return by dividing net operating income (NOI) by total property value:

Cap Rate = Net Operating Income (NOI) / Property Purchase Price

Cash-on-cash return measures annual cash flow relative to out-of-pocket cash invested for down payment, closing fees, and repairs:

(After-repair value x 0.70) - repair costs = maximum purchase price

70% rule

The 70% rule is a real estate investment rule of thumb for house flippers rather than people buying homes to rent out. It states that investors should aim to spend no more than 70% of a home’s expected after-repair value on a home. That includes the purchase price and any expenses incurred as part of repairing it.

The formula for the 70% rule is:

(After-repair value x 0.70) – repair costs = maximum purchase price

For example, if you see a home that you think you can sell for $300,000, but know it will need about $35,000 in repairs to get it into sellable condition, you should pay no more than:

($300,000 x 0.70) – $35,000

$210,000 – $35,000

$175,000 = maximum purchase price

FAQ

Here are the answers to some frequently asked questions about the 1% rule in real estate.

Do lenders require the 1% rule?

No, mortgage lenders do not require properties to meet the 1% rule to qualify for investment property financing. Lenders evaluate appraisal reports, DSCR, borrower credit scores, and debt-to-income (DTI) limits during underwriting.

Does the 1% rule apply to short-term rentals?

No, the 1% rule is designed for long-term lease agreements. Short-term vacation rentals experience seasonal occupancy, variable nightly rates, and higher turnover expenses, requiring specialized hospitality revenue projections.

Can the 1% rule be used in California?

While you can run the math in any state, reaching the 1% threshold in California or other high-cost coastal markets is very difficult. Investors in high-cost states generally accept lower rent-to-price ratios in exchange for long-term equity appreciation and strong tenant demand.

The bottom line

Finding good investment opportunities is one of the hardest things to do as a real estate investor. The 1% rule states that for a property to be a good investment, the monthly rent it generates must be at least 1% of the home’s purchase price. This is not a guarantee of profit. Investors should carefully consider the purchase of any property before moving forward.

This rule can help investors quickly screen investment opportunities and decide whether the property is worth further research.

If you’re looking to buy a home either as an investment or to live in yourself, you can get started by applying for a mortgage with Rocket Mortgage.

¹The 1% rule does not guarantee return on investment profit and only suggests the property may cash flow if typical costs fit within a rough cap rate band.

²Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice. If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/mortgage-rates, where current pricing and various loan terms are made available.

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