What is the 1% rule?
The 1% rule is a quick way to sort rental listings. It says a property’s monthly rent should be at least 1% of its price, counting any repairs you’ll need to make up front. A $200,000 house should rent for about $2,000 a month.
It’s popular because you can do it in your head while scrolling listings. It isn’t an analysis: it ignores taxes, insurance, the interest rate and everything else that decides whether a property actually makes money.
Worked example
A house listed at $220,000 that rents for $2,000 a month:
- $2,000 ÷ $220,000 = 0.91%, just short of the 1% rule
- To pass, it would need $2,200 a month in rent, or a price of $200,000 or less
Now the 50% rule: assume half the rent, $1,000, goes to operating costs. With 25% down at 7.25%, the mortgage is about $1,126 a month, so the rough cash flow is about −$126 a month.
That’s the catch: at today’s interest rates, a property that comes close to the 1% rule can still lose money every month. The rule is a first filter, not a green light.
The 50% rule and the 2% rule
- The 50% rule says operating costs (taxes, insurance, repairs, vacancy, management, but not the mortgage) tend to eat about half the rent over time. The other half has to cover the mortgage, and what’s left is your rough cash flow.
- The 2% rule is the same screen with a higher bar. Properties that pass are usually cheap, and often in tougher neighborhoods or need a lot of work.
When the 1% rule misleads
- Expensive markets. In many higher-priced areas almost nothing passes, yet investors still buy for appreciation. The rule can’t tell you whether that bet is worth it.
- High interest rates. The rule was popular when mortgages were cheaper. At higher rates, passing it doesn’t guarantee cash flow, as the example shows.
- Taxes and insurance vary a lot. Two houses with the same rent and price can have very different tax bills.
Frequently asked questions
Should I include repairs in the price?
Yes. If a $180,000 house needs $20,000 of work before you can rent it, compare the rent with $200,000.
Is the 1% rule still realistic?
In many markets it’s hard to find. That’s fine: use it as a quick filter, then check the deal’s real cash flow and cap rate.
Is the 50% rule accurate?
It’s a long-run average. Newer properties with tenants paying utilities often run lower; older buildings where you pay heat can run higher. Real numbers beat the rule every time.
What should I check after the 1% rule?
Cash flow with real taxes and insurance, cash-on-cash return and DSCR. The rental cash flow calculator is a good next step.
Run the real numbers
ElmCheck’s free deal analyzer takes the price, rent and loan from here. Add the property taxes and insurance and you’ll get cash flow, cap rate, cash-on-cash return, DSCR and a buy, maybe or pass verdict.