The 1% Rule

The 1% rule is one of the most widely cited shortcuts for quickly evaluating the income potential of a rental property. This rule states that a property is more likely to be a good investment if the monthly rent is at least 1% of the property's purchase price. In other words, if you buy a property for $200,000, you should look for a monthly rent of at least $2,000. This rule is easy to remember and fast to apply, making it a popular first filter when scanning listings or comparing multiple properties.

The 1% rule is not a guarantee of profitability, but rather a starting point. It helps you rapidly estimate whether a property might generate enough income to cover expenses such as mortgage payments, taxes, insurance, and maintenance. However, the rule does not account for local market conditions, property taxes, vacancy rates, or unexpected repairs. As a result, it should never be the only metric you rely on when making a rental property decision.

Suppose you are considering a property listed at $150,000. According to the 1% rule, you would want to see a monthly rent of at least:

If the property can realistically be rented for $1,500 or more per month, it passes the initial 1% rule test. If the rent is significantly lower, such as $1,200, this is a sign that the property may not generate enough income to comfortably cover your expenses and provide a reasonable return.

Remember, the 1% rule is only a starting point. It does not replace a full analysis that considers all costs and local factors. Always use it as an initial screen, not a final decision tool.