What Is the 1% Rule in Real Estate? Realistic Guide & Alternatives

The 1% rule in real estate investing is a quick-screening tool many investors use. It states that a property’s gross monthly rent should be at least 1% of its purchase price, including repairs, to provide a buffer for expenses and positive cash flow. This rule helps filter out lower-potential investment properties at a glance.

How to Calculate the 1% Rule

1. Determine the total investment cost, including purchase price and any rehab or repair expenses.
2. Multiply that total by 0.01 (1%).

For example, if the total cost is $160,000, the minimum rent should be $1,600/month.

When Is the 1% Rule Useful?

• Fast deal screening: eliminate weak cash flow prospects early in the process.
• Helps set expectations for rent relative to price.
• Still viable in mid-tier or cash-flow-friendly markets, especially with current interest rates and cap rates.

Limitations: Why the 1% Rule May Not Work Today

• Housing values outpace rents in high-cost areas, making it nearly impossible to meet the 1% threshold.
• Ignores other critical costs, taxes, insurance, maintenance, vacancy, property management, mortgage interest, etc.
• Market variance, luxury or coastal markets often don’t support the 1% benchmark.

“I haven’t seen 1% in my market in over 10 years…” Reddit commentator summarizing real-world investor sentiment.

Alternatives & Complementary Metrics

• 2% Rule: Requires rent to equal at least 2% of purchase price, suitable for budget-friendly markets.
• Gross Rent Multiplier (GRM): Purchase price divided by annual rent, lower is better.
• Net Operating Income (NOI) & Cap Rate: Profit after expenses, divided by property price for yield metrics.
• Total ROI: Includes rent, appreciation, equity paydown, and tax benefits.

Market Realities: High-Cost vs. Lower-Cost Regions

In regions like San Francisco, a $1 M home would need $10,000/month rent to hit 1%, yet typical rents hover around $3,500.

Example: Does This Pass the 1% Test?

• Purchase & Rehab Costs: $150,000 + $10,000 = $160,000
• 1% Rule Threshold: 1% × $160,000 = $1,600/month required rent
• If rent is $1,600 or more → property meets 1% rule.
• If rent is $1,200 → does not meet 1% rule and may struggle to cash flow.

When You Might Still Choose a Below-1% Property

• In a market with strong appreciation, long-term gain can outweigh short-term rent metrics.
• Tax benefits, amortization, and leverage may offset lower cash flow temporarily.
• High-demand areas may command strong tenant demand and future rent increases.

FAQs

Q: Is the 1% rule realistic today?
A: It’s useful in select markets, but not universal, particularly difficult in expensive cities.

Q: Should I use the 1% or 2% rule?
A: Use 2% in lower-cost, cash-forward markets; 1% in moderate markets. Neither works well in high-priced areas.

Q: Does 1% rent guarantee profit?
A: No, it provides a baseline, but other costs and financing significantly impact net cash flow.

Bottom Line

The 1% rule in real estate can be a helpful starting point to assess whether a property has rental income potential. However, it must be paired with deeper financial analysis, including operating costs, financing, market trends, and long-term value. Use it as a screening filter, not your only decision tool.

Written by Vanessa Gallanti. August 4, 2025

Enthusiast about planning, project management, construction materials and technology, and construction. A civil engineer from Los Andes University and a content writer for Kukun.