1% Rule Calculator

What is the 1% Rule?

The 1% Rule is a quick screening tool used by real estate investors to evaluate potential rental properties before conducting a detailed analysis. The rule states that a property's monthly rental income should be at least 1% of its total purchase price for the investment to potentially generate positive cash flow.

For example, if you're looking at a property that costs $200,000, the 1% Rule suggests you should be able to rent it for at least $2,000 per month. This simple calculation helps investors quickly filter out properties that are unlikely to be profitable, saving time and effort before diving into more complex financial analyses.

The 1% Rule exists as a first-line filter in the property evaluation process. It's not a comprehensive analysis tool but rather a quick way to determine whether a property deserves further investigation. Think of it as a preliminary screening test—if a property passes the 1% Rule, you proceed with detailed cash flow analysis, cap rate calculations, and other metrics. If it fails significantly, you can move on to the next opportunity without wasting time on a property unlikely to meet your investment goals.

How to Use the 1% Rule

Using the 1% Rule is straightforward, making it one of the most practical tools for quickly evaluating rental properties. Here's a step-by-step guide:

Step-by-Step Guide:

1. Identify the Purchase Price: Determine the total cost to acquire the property, including the purchase price and any immediate renovation costs needed to make it rentable.
2. Estimate Monthly Rent: Research comparable rentals in the area to estimate what you could realistically charge for monthly rent.
3. Calculate the Percentage: Divide the monthly rent by the purchase price and multiply by 100. This gives you the percentage.
4. Compare Against the Benchmark: If the result is 1% or higher, the property passes the initial screening. If it's between 0.7% and 0.99%, it's borderline and may work depending on other factors. Below 0.7% typically indicates the property won't cash flow well.

When to Apply the 1% Rule:

Apply the 1% Rule during the initial property search phase, before scheduling property tours or making offers. It's particularly useful when browsing online listings, attending auctions, or receiving property information from wholesalers. The rule helps you quickly prioritize which properties warrant deeper investigation.

What It Tells You (And What It Doesn't):

The 1% Rule tells you whether a property has the potential for positive cash flow based on gross rental income. However, it doesn't account for operating expenses, mortgage payments, vacancies, repairs, property management fees, or taxes. It also ignores appreciation potential, location quality, and long-term value. Always follow up with comprehensive financial analysis before making an investment decision.

Does the 1% Rule Still Work in 2026?

The effectiveness of the 1% Rule in 2026 varies dramatically by market and has evolved significantly from when it was first popularized. In many markets, particularly high-cost coastal cities, the traditional 1% Rule has become nearly impossible to achieve. However, in other regions, it remains a valid and useful screening tool.

Regional Variations:

Midwest and South: The 1% Rule often still applies in markets like Indianapolis, Cleveland, Memphis, and many secondary cities in Texas, Ohio, and the Southeast. Properties in these regions can frequently hit or exceed the 1% threshold due to lower purchase prices relative to rents.

Coastal Cities: In expensive markets like San Francisco, Los Angeles, New York, Boston, and Seattle, achieving the 1% Rule is virtually impossible. These markets typically see percentages ranging from 0.3% to 0.6%, yet investors still buy because of strong appreciation potential and market stability.

Small Towns and Rural Areas: Some smaller markets can even exceed the 1% Rule, sometimes reaching 1.5% or even 2%. However, these markets may come with higher vacancy risk, lower appreciation, and less liquidity when it's time to sell.

Market Adjustments:

Many modern investors have adapted the rule for today's market conditions:

• The 0.7% Rule: Used in higher-priced markets where 1% is unrealistic but cash flow is still possible
• The 2% Rule: A more aggressive target for investors in lower-priced markets seeking maximum cash flow
• The 50% Rule: An alternative that suggests total expenses will equal 50% of gross rent

When to Modify the Rule:

Consider adjusting your threshold based on your strategy. Buy-and-hold investors focused on appreciation might accept 0.6-0.7% in strong markets. Cash flow investors in lower-priced markets might insist on 1.2% or higher. House hackers might accept even lower percentages since they're offsetting their own housing costs.

Limitations of the 1% Rule

While the 1% Rule is a helpful screening tool, it has significant limitations that every investor must understand:

Doesn't Account for Expenses:

The 1% Rule only considers gross rental income, completely ignoring operating expenses such as property taxes, insurance, maintenance, repairs, property management fees, HOA dues, and utilities. A property that passes the 1% Rule could still lose money every month once these expenses are factored in.

Ignores Financing Costs:

The rule doesn't consider mortgage payments, interest rates, or down payment amounts. A property with a high mortgage payment might pass the 1% Rule but still produce negative cash flow after debt service. Always run the numbers with your actual financing terms.

Doesn't Consider Appreciation:

Some of the best long-term real estate investments fail the 1% Rule but succeed because of strong appreciation. Markets like California, Washington, and parts of New York have historically delivered excellent returns through property value appreciation, even with low rental yields.

Market Variations Make It Unrealistic:

The 1% Rule is impossible to achieve in many desirable markets. San Francisco, Manhattan, and Beverly Hills properties might only hit 0.3-0.5%, yet these can still be excellent investments for the right buyer with the right strategy.

When to Break the 1% Rule

There are legitimate scenarios where purchasing a property that fails the 1% Rule can be a smart investment decision:

Strong Appreciation Markets:

In markets with consistent historical appreciation like San Francisco, Seattle, Austin, or parts of Southern California, investors often accept lower cash flow (or even slight negative cash flow) in exchange for property value growth. If a property appreciates 6-8% annually, a 0.5% rental yield might still produce excellent total returns.

House Hacking Situations:

When you live in one unit and rent out others, the math changes completely. Even if the property fails the 1% Rule, if it reduces or eliminates your housing expense while building equity, it can be an excellent investment for building wealth.

Long-Term Hold Strategies:

Investors with 20-30 year time horizons might prioritize neighborhood quality, school districts, and appreciation potential over immediate cash flow. As mortgages get paid down and rents increase over time, properties that initially fail the 1% Rule can become cash flow machines.

Below-Market Purchase Opportunities:

If you buy a property significantly below market value—through foreclosure, estate sale, or distressed seller—the effective purchase price for the 1% Rule calculation might be much lower than the actual market value, making it a good deal even if the listed price fails the test.

Future Development Potential:

Properties in up-and-coming neighborhoods or those with the potential for adding units, converting to short-term rentals, or other value-add opportunities might justify breaking the 1% Rule based on future potential rather than current numbers.

Regional Variations

Understanding how the 1% Rule applies differently across various regions is crucial for setting realistic expectations:

Midwest and South:

Markets like Indianapolis, Memphis, Cleveland, Columbus, Kansas City, and many Texas cities regularly see properties that meet or exceed the 1% Rule. These markets offer strong cash flow potential with lower entry costs, making them attractive to investors focused on monthly income. However, appreciation may be slower compared to coastal markets.

Coastal Cities:

In expensive markets such as San Francisco (0.3-0.4%), Los Angeles (0.4-0.5%), New York City (0.3-0.5%), Boston (0.4-0.6%), and Seattle (0.5-0.6%), the 1% Rule is essentially unachievable. Investors in these markets focus more on appreciation, market stability, job growth, and long-term equity building rather than immediate cash flow.

Small Towns and Rural Areas:

Smaller markets and rural areas can sometimes deliver 1.5%, 2%, or even higher percentages. While the cash flow looks attractive on paper, these markets often come with challenges including higher vacancy rates, limited tenant pools, lower appreciation, difficulty selling when needed, and potential for economic decline if major employers leave the area.

Why Location Matters:

Location affects not just the percentage you can achieve, but also risk factors like vacancy rates, tenant quality, property value stability, and exit strategy options. A property at 0.6% in a thriving urban market might be less risky than a property at 1.5% in a declining rural area. Always consider the complete picture beyond just the percentage.

1% Rule vs. Other Metrics

The 1% Rule is just one tool in the real estate investor's toolkit. Understanding how it relates to other key metrics helps you build a complete picture of an investment's potential:

1% Rule vs. Cap Rate:

The 1% Rule uses gross rental income and purchase price, while cap rate divides net operating income (after expenses) by property value. Cap rate is more accurate for evaluating actual returns but requires more detailed information. Use the 1% Rule for quick screening, then calculate cap rate for properties that pass the initial test. A property can pass the 1% Rule but have a poor cap rate if expenses are high.

1% Rule vs. Cash Flow Analysis:

Cash flow analysis is the most comprehensive metric, accounting for all income, all expenses, mortgage payments, and providing your actual monthly profit or loss. The 1% Rule is a shortcut that doesn't replace cash flow analysis. Think of the 1% Rule as deciding whether to open a book, while cash flow analysis is actually reading it.

1% Rule vs. ROI (Return on Investment):

ROI measures your total return including cash flow, appreciation, equity buildup, and tax benefits, divided by your actual cash invested. A property might fail the 1% Rule but deliver excellent ROI through appreciation and leverage. Conversely, a property might pass the 1% Rule but have poor ROI if you had to invest heavily in repairs or if appreciation is negative.

How They Work Together:

Use these metrics in sequence: 1% Rule for initial screening, cap rate for comparing similar properties, cash flow analysis before making an offer, and ROI for evaluating actual performance over time. Each metric provides different insights, and the best investors use all of them to make informed decisions.

Frequently Asked Questions