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What Is the 1% Rule in Real Estate Investing?
The 1% Rule is a quick and simple metric that real estate investors use to evaluate the cash flow potential of a rental property. It states that a rental property should generate monthly rent equal to at least 1% of its purchase price to be considered a potentially good investment.
This rule helps investors quickly assess whether a property meets the minimum standard for cash flow profitability before digging into deeper financial analysis.
How the 1% Rule Works
The formula is straightforward:
Monthly Rent ≥ 1% of Purchase Price
For example, if a property costs $150,000, it should rent for at least $1,500 per month to meet the 1% rule.
Example Calculations:
| Purchase Price | Target Monthly Rent (1%) |
|---|---|
| $100,000 | $1,000 |
| $200,000 | $2,000 |
| $300,000 | $3,000 |
If a property rents for less than 1%, it may not generate enough income to cover your monthly expenses and still provide cash flow. If it rents for more than 1%, it could be a strong cash-flowing opportunity worth further investigation.
Why the 1% Rule Matters for Real Estate Investors
1. Quick Property Screening
The 1% Rule helps you narrow down which properties are worth a deeper financial dive. In hot markets where deals go fast, this rule is a time-saving filter.
2. Cash Flow Indicator
Meeting the 1% Rule usually means there’s enough room in the rent to cover:
- Mortgage payments
- Property taxes
- Insurance
- Maintenance
- Property management
And still leave you with positive monthly cash flow.
3. Low Barrier for New Investors
For beginner investors, the 1% Rule provides a low-complexity way to start thinking like a pro without immediately diving into spreadsheets or ROI formulas.
When the 1% Rule Works Best
The 1% Rule is most effective in markets with:
- Lower purchase prices
- High rental demand
- Minimal property taxes
- Affordable insurance rates
Examples: Many Midwest and Southern U.S. markets (e.g., Indianapolis, Cleveland, Birmingham) often have properties that meet or exceed the 1% rule.
When the 1% Rule Falls Short
While the 1% Rule is a great screening tool, it’s not a substitute for full financial due diligence.
Scenarios Where It May Mislead:
- High-Tax States: Properties may pass the 1% test but fail to cash flow after property taxes.
- Expensive Markets: In areas like San Diego or New York, the 1% Rule is rarely achievable. A property renting for 0.6% of its value might still be a good long-term play based on appreciation.
- Deferred Maintenance: A property may pass the rule but require tens of thousands in repairs.
- Overly Aggressive Rent Projections: Sellers or agents might overstate rent estimates to make the numbers look good.
The 1% Rule vs. Other Real Estate Metrics
| Metric | What It Measures | Best Use |
|---|---|---|
| Best Use | Rent-to-price ratio | Rent-to-price ratio |
| Cap Rate | Net operating income vs. price | Comparing profitability of properties |
| Cash-on-Cash Return | Annual cash flow vs. cash invested | Investor ROI |
| Gross Rent Multiplier (GRM) | Price ÷ Annual Rent | Market comparisons |
| DSCR (Debt Service Coverage Ratio) | NOI ÷ Debt Payments | Loan qualification metric |
Pro Tip: Use the 1% Rule to identify candidates, but always follow up with a cap rate and cash-on-cash return analysis before making an offer.
The 1% Rule in Action: Sample Property Analysis
Let’s compare two properties side by side using the 1% Rule.
Property A (Meets 1% Rule)
- Price: $120,000
- Rent: $1,250/month
- 1% Target Rent: $1,200
✅ Passes the 1% Rule
Now let’s estimate expenses:
| Expense | Monthly Estimate |
|---|---|
| Mortgage (20% down, 7%) | $636 |
| Property Taxes | $150 |
| Insurance | $75 |
| Maintenance Reserve | $100 |
| Property Management | $125 |
| Total Monthly Expenses | $1,086 |
Net Monthly Cash Flow: $1,250 – $1,086 = $164
Annual Cash Flow: $1,968
Cash-on-Cash Return (assuming $24,000 down): 8.2%
Property B (Fails 1% Rule)
- Price: $250,000
- Rent: $1,700/month
- 1% Target Rent: $2,500
❌ Fails the 1% Rule
Even if the cash flow is close to break-even, this property may not justify the risk unless appreciation potential is high or a long-term wealth strategy is in play.
Does the 1% Rule Still Work in 2025?
With rising property prices and increased interest rates, many investors wonder if the 1% Rule is outdated. While harder to achieve in many metro areas, the principle still holds value as a rule of thumb—especially in cash flow-focused markets.
In today’s market, some investors now use the 0.8% Rule as a more flexible screening tool. For instance, a $200,000 property that rents for $1,600/month may still be viable if taxes and insurance are low.
How Hard Money and DSCR Loans Fit Into the 1% Rule
If you’re financing your property with a hard money loan or a DSCR loan, lenders often care more about the property’s income-producing potential than your personal income.
Why This Matters:
- DSCR lenders prefer properties with strong cash flow.
- A DSCR of 1.2+ is generally required.
- Properties that meet or exceed the 1% Rule tend to qualify more easily.
That’s why private lenders, such as Investors Choice Funding, love working with investors who use metrics like the 1% Rule. It shows you’re focused on deals that cash flow well.
Final Thoughts: Should You Follow the 1% Rule?
The 1% Rule isn’t perfect, but it’s a powerful tool in the investor’s toolkit.
✅ Use It To:
- Quickly eliminate poor cash-flowing deals
- Evaluate deals in budget-friendly markets
- Spot properties that may qualify for DSCR financing
🚫 Don’t Use It To:
- Justify skipping full underwriting
- Evaluate appreciation-only markets
- Make investment decisions without confirming expenses
Smart investors use the 1% Rule as a starting point—not the final say. If a property meets the rule, dig deeper. If it doesn’t, consider whether it still fits your investment goals.
Work with a Lender That Understands the Math
At Investors Choice Funding, we help investors secure funding for rental properties that meet strong performance criteria like the 1% Rule. Whether you’re buying your first investment property or scaling your portfolio, we offer:
- DSCR loans
- Hard money rehab loans
- BRRRR-friendly financing
- Fast closings and flexible underwriting
Contact us today to get pre-approved and find out how we can help fund your next cash-flowing deal.
