1% Rule in Real Estate – What It Means for Buyers and Investors

Ever heard someone say a rental should bring in at least 1% of its price each month? That’s the 1% rule, a fast way to see if a property might earn cash flow. It’s not a law, just a rule‑of‑thumb that helps you filter out deals that look too cheap or too pricey.

How the 1% Rule Works

Take the asking price of a home, divide it by 100, and that’s the monthly rent you’d hope to collect. For a $200,000 house, you’d look for about $2,000 a month. If the local market can’t support that rent, the property probably won’t cover mortgage, taxes, insurance, and upkeep.

To use the rule, line up the purchase price, expected rent, and your financing costs. If the rent is close to or above the 1% target, you’re in a good spot to generate positive cash flow. If it’s far below, you’ll need to dig deeper—maybe the neighborhood is up‑and‑coming, or you can add value with renovations.

Real‑World Tips for Using the 1% Rule

Don’t treat the rule as a final verdict. Look at property taxes, insurance, and HOA fees—these can eat into that 1% margin quickly. Also, factor in vacancy rates; a realistic assumption is 5‑10% of the year without a tenant.

When you find a property that meets the 1% rule, run a full cash‑flow analysis. List all monthly expenses, subtract them from the rent, and see what’s left. That leftover is your net cash flow, the number that matters for long‑term wealth.

If a property falls short of the 1% target, ask yourself if you can boost rent later. Upgrading kitchens, adding a bedroom, or improving curb appeal can raise rent enough to meet the rule after a few months.

The rule works best in high‑rent markets—big cities, college towns, or tourist areas. In slower markets, you might need to aim for a lower percentage, like 0.8% or even 0.5%, but then you must be more aggressive about cost control.

Finally, remember the rule is a screening tool, not a guarantee. Use it to narrow down listings, then do the detailed numbers before you commit. With that approach, the 1% rule can save you time and help you focus on properties that have real cash‑flow potential.