The 1% rule, and the two places it breaks
A screening shortcut that works well for sorting a list and badly for deciding anything, because it ignores the two costs that vary most between properties.
The short answer
The 1% rule says monthly rent should be at least 1% of the purchase price. It is a filter for discarding obviously weak listings quickly, not a test of whether a property works, because it ignores property tax and financing, which are the two costs that differ most between otherwise similar properties.
The formula
monthly rent / purchase price = the ratio
1% or above passes the screen
required rent to pass = purchase price x 0.01
It is a ratio, not a return. Nothing in it accounts for what the property costs to hold, which is why two properties can both pass and behave completely differently.
Worked example
Two houses, both bought at $285,000, both renting at exactly $2,850, so both pass the rule perfectly. The only difference is where they are:
House A property tax 0.6% = 1,710/yr = 142.50/mo
House B property tax 2.2% = 6,270/yr = 522.50/mo
difference = 380.00 a month on identical rent
as a share of rent = 380 / 2,850 = 13.3%
Both score 1.00%. One keeps $380 a month more than the other before anything else is counted, and the rule cannot see it.
What the rule is actually good for
Sorting. If you are looking at forty listings, the rule discards the twenty five that are obviously priced for appreciation rather than income, in about a minute. That is a real use and it saves real time.
It also travels badly across markets and everyone knows it. In much of the coastal United States and most of Western Europe almost nothing hits 1%, and applying the rule there just returns an empty list rather than a warning that you are in a different kind of market.
The second place it breaks
Financing. The rule is a property measure with a financing-shaped hole in it. Two buyers of the same house at 25% down and 5% down have wildly different monthly outcomes, and the ratio is identical for both.
This matters more now than it did when the rule became popular. It circulated widely in a period of cheap borrowing, when the gap between a passing ratio and positive cash flow was small. At higher rates that gap is wide enough that a property can clear 1% and still be negative every month.
What to use once a property survives the screen
Cash flow, then cash-on-cash return, then cap rate for comparing against other buildings. In that order, because they answer questions in the order you need them answered.
The full arithmetic takes ten minutes on a property you are seriously considering. The rule takes ten seconds on forty you are not, and treating either as a substitute for the other is where people get hurt.
What this leaves out
- Tax rates are illustrative. Effective property tax varies by an order of magnitude between jurisdictions and sometimes between neighbouring towns.
- Ignores insurance, which in some coastal and wildfire-exposed markets now moves as much as tax does.
- Assumes purchase price is the right denominator. On a property needing work, price plus rehab is the honest figure and it lowers the ratio.
This arithmetic is free to run in your browser — no signup, nothing held back.
Open the free calculatorCommon questions
- Is the 1% rule still relevant?
- As a screening filter, yes. As a buying test it was always weak and higher borrowing costs have widened the gap between passing the screen and making money. Treat a passing score as permission to do the real arithmetic, not as a result.
- What about the 2% rule?
- Properties at 2% exist, mostly in markets with high vacancy, high turnover or low appreciation, and the ratio is high precisely because the risks are. A very high score is a prompt to ask what the market knows that you do not.
- Should rehab costs be included in the price?
- Yes, if you want the ratio to mean anything. A property at $200,000 needing $60,000 of work is a $260,000 property, and running the rule against the sticker price flatters every fixer-upper you look at.
Spreadsheets that do this
The formulas above, already built and checked — so you fill in your numbers rather than the arithmetic.
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Last reviewed 22 August 2026