The 1% rule is a quick screening test for rental properties. It states that a property's monthly rent should equal at least 1% of its purchase price. If it does, the property is more likely to generate positive cash flow. If it doesn't, you'll need to look more carefully at the numbers before committing.
The 1% Rule Formula
Monthly Rent / Purchase Price ≥ 1%
For example: a property that costs $200,000 should rent for at least $2,000 per month to pass the 1% rule.
$2,000 / $200,000 = 1.0% ✓
A $400,000 property would need to rent for at least $4,000/month — a much harder bar to clear.
What the 1% Rule Actually Tells You
The rule is a proxy for cash flow potential, not a guarantee of it. When rent equals 1% of the purchase price, there's typically enough gross income relative to the mortgage to cover expenses and leave something left over — assuming a conventional mortgage with 20–25% down.
It's designed to be used in the first 30 seconds of evaluating a deal. If a property can't get close to 1%, you can move on without running a full analysis.
The 2% Rule
The 2% rule is a stricter version: monthly rent should equal 2% of the purchase price. In most markets today, properties that meet the 2% rule are rare — you'd typically find them in low-cost rural areas or distressed markets where appreciation potential is limited.
The 2% rule was more common in the 1970s–1990s, when home prices were lower relative to rents. In most metro areas today, even 1% is difficult to achieve.
When the 1% Rule Breaks Down
The 1% rule is a rough heuristic, not a complete analysis. It breaks down in several situations:
High-cost markets: In cities like San Francisco, New York, or Seattle, most properties rent for 0.3–0.5% of their value. Investors in these markets typically accept lower cash flow in exchange for appreciation. Using the 1% rule would eliminate nearly every deal.
Short-term rentals: If a property is used for Airbnb or VRBO, gross monthly income can be much higher than a long-term lease — but so are expenses (cleaning, platform fees, vacancies). The 1% rule isn't designed for this model.
Value-add deals: A distressed property might fail the 1% rule at its current rents, but pass after renovation. The rule applies to current income, not potential income.
Highly leveraged deals: The 1% rule assumes a typical down payment and mortgage structure. If you're paying all cash, you can pencil in a deal with a much lower rent-to-value ratio. If you're putting less than 20% down, even a 1% deal may not cash flow after PMI.
Using the 1% Rule in Practice
Think of it as a filter, not a verdict. Here's how to use it:
- Calculate the monthly rent-to-price ratio on any property you're considering.
- If it's well below 0.7%, skip it unless you have a strong appreciation thesis.
- If it's at or above 1%, run a full cash flow analysis to confirm the numbers.
- Use the ratio to compare similar properties quickly.
The real value of the rule is speed. When you're reviewing 20 listings, a ratio calculation takes 10 seconds and immediately sorts them by potential.
Related Metrics
GRM (Gross Rent Multiplier): The inverse of the rent-to-value ratio expressed as a multiple. A 1% property has a GRM of about 8.3. A 0.5% property has a GRM of about 16.7. Lower GRM is better.
Cap rate: Measures net income (after expenses) relative to value. A property can pass the 1% rule and still have a low cap rate if expenses are high.
Cash-on-cash return: Measures return on the actual cash invested. The 1% rule says nothing about financing, so two identical properties can have very different cash-on-cash returns depending on the loan terms.
Check Any Property with the Calculator
The Rent-to-Value Rule Calculator lets you enter a property price and monthly rent to instantly see the ratio, whether it passes the 1% and 2% rules, and the implied GRM.