What Is the One Percent Rule?
The one percent rule, sometimes stylized as the "1% rule," is used to determine if the monthly rent earned from a piece of investment property will exceed that property's monthly mortgage payment. The goal of the rule is to ensure that the rent will be greater than or—at worst—equal to the mortgage payment, so the investor at least breaks even on the property.
Key Takeaways:
- The rent charged should be equal to or greater than the investor's mortgage payment to ensure that they at least break even on the property.
- Multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent.
- Ideally, an investor should seek a mortgage loan with monthly payments of less than the 1% figure.
The one percent rule can provide a baseline for establishing the level of rent that commercial property owners charge on real estate space. This rent level can apply to all types of tenants in both residential and commercial real estate properties.
Purchasing a piece of property for investment requires a thorough analysis of numerous factors. The one percent rule is just one measurement tool that can help an investor gauge the risk and potential gain that might be achieved by investing in a property.
How the One Percent Rule Works
This simple calculation multiplies the purchase price of the property plus any necessary repairs by 1%. The result is a base level of monthly rent. It's also compared to the potential monthly mortgage payment to give the owner a better understanding of the property’s monthly cash flow.
This rule is only used for quick estimation because it doesn't take into account other costs associated with a piece of property, such as upkeep, insurance, and taxes.
Example of the One Percent Rule
An investor is looking to obtain a mortgage loan on a rental property with a total payoff value of $200,000. Using the one percent rule, the owner would calculate a $2,000 monthly rent payment: $200,000 multiplied by 1%. In this case, the investor would seek a mortgage loan with monthly payments of less than and absolutely no more than $2,000.
The One Percent Rule vs. Other Types of Calculations
The one percent rule also helps give an investor a base point from which to consider other factors regarding the ownership of a property. A second important calculation is the gross rent multiplier, which uses the monthly rent level to determine the amount of time it will take to pay off the investment. This calculation is achieved by dividing the total borrowed value by the monthly rent.
In the example of the home with a value of $200,000, the investor would divide $200,000 by $2,000. This gives the investor a 100-month payoff period, which translates to a little over 8.3 years. Investors can also use the gross rent multiplier when considering the payment schedule terms of a loan taken for the property.
The 70% rule implies that an investor should not pay more than 70% of the property's estimated value after repairs fewer costs.
Special Considerations
In calculating the gross rent multiplier, a buyer must also consider the rental rates in the area in which the property is located. If the standard rate for rent in the neighborhood is less than $2,000 for the buyer in this example, the investor might have to consider decreasing the rent to ensure that they find a tenant.
Another important factor to consider is maintenance on the property. The property owner is responsible for upkeep and repairs. While a deposit might cover substantial damages, it's also important for the owner to budget a specified amount of the rent for savings toward maintenance. This can contribute to profits if it's unused, and the money would be available when any maintenance needs arise.
Overall, investing in real estate can be lucrative for long-term investors. The base rent that an owner charges on any type of property sets the level of payments expected by tenants. Owners typically raise rent annually to manage inflation and other costs associated with the property, but the base rate is an important level that determines the overall return on an investment.
FAQs
The 1% rule states that a rental property's income should be at least 1% of the purchase price. For example, if a rental property is purchased for $200,000, the monthly rental income should be at least $2,000.
What is the 1 percent rule in real estate example? ›
Examples Of The 1% Rule
Let's say you need to make about $10,000 in repairs before renting the home. Add the cost of repairs to the home's purchase price for a total of $160,000. Then multiply the total by 1%. You'll get a $1,600 minimum monthly rental rate.
How realistic is the 1% rule in real estate? ›
The 1% rule isn't foolproof, but it can be a good tool to help you whether a rental property is a good investment. As a general rule of thumb, it should be used as an initial prescreening tool to help you narrow down your list of options.
What is the 4 3 2 1 rule in real estate? ›
Analyzing the 4-3-2-1 Rule in Real Estate
This rule outlines the ideal financial outcomes for a rental property. It suggests that for every rental property, investors should aim for a minimum of 4 properties to achieve financial stability, 3 of those properties should be debt-free, generating consistent income.
What is the 2% rule in real estate? ›
The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.
What is the 7% rule in real estate? ›
It has often been said that 20% of the players do 80% of the business: the 80/20 rule as it is sometimes referred to. However, this contrast has reportedly become even starker in the real estate world. According to the data, just 7% of real estate agents do 93% of the business.
What is the 100x rent rule? ›
Savvy real estate investors often pay no more than 100 times the monthly rent to purchase a property. In the case of the couple above, an investor following the 100 times monthly rent rule wouldn't pay more than $750,000 because the monthly market rent was $7,500.
What are the 5 golden rules of real estate? ›
If you follow these 5 Golden Rules for Property investing i.e. Buy from motivated sellers; Buy in an area of strong rental demand; Buy for positive cash-flow; Buy for the long-term; Always have a cash buffer. You will minimise the risk of property investing and maximise your returns.
What is the 80 20 rule real estate? ›
What is the 80/20 Rule exactly? It's the idea that 80% of outcomes are driven from 20% of the input or effort in any given situation. What does this mean for a real estate professional? Making more money in real estate is directly tied to focusing your personal energy on the most high value areas of your business.
Is the 1% rule outdated? ›
The 1% rent-to-price (RTP) ratio rule, once a go-to method for estimating rental property cash flow, may no longer hold its ground in today's real estate landscape. Recent evidence suggests that this rule is losing its effectiveness due to inflated home prices and shifts in the rental market.
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
What is the 3% rule in real estate? ›
1%, 2% or 3% rule is a gage of measuring if the investment would be profitable. The comparison is between the gross rent and the purchase price. 50% rule relates to quick reference practice of estimating your operating expenses so you can arrive at your NOI (net operating income). 1. Realty Circle.
How do you calculate the 1% rule in real estate? ›
How the One Percent Rule Works. This simple calculation multiplies the purchase price of the property plus any necessary repairs by 1%. The result is a base level of monthly rent. It's also compared to the potential monthly mortgage payment to give the owner a better understanding of the property's monthly cash flow.
What is the 80% rule in real estate? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
What is the 90 10 rule in real estate? ›
He explained how investors can leverage strengths in one area to complement others, fostering balanced and effective partnerships. Roger shared his 10/90 rule, balancing risk by investing 10% in higher-risk projects and 90% in stable, cash-flowing properties.
What is the 7 rule in real estate? ›
In fact, in marketing, there is a rule that people need to hear your message 7 times before they start to see you as a service provider. Therefore, if you have only had a few conversations with the person that listed with someone else, then chances are, they don't even know you are in real estate.
Why is there a 70% rule in real estate? ›
The 70% rule helps home flippers determine the maximum price they should pay for an investment property. Basically, they should spend no more than 70% of the home's after-repair value minus the costs of renovating the property.
What is the 5 percent rule? ›
The five percent rule, aka the 5% markup policy, is FINRA guidance that suggests brokers should not charge commissions on transactions that exceed 5%.
What is the golden rule in real estate? ›
Corcoran's Golden Rule of real estate investing consists of two main parts. The first is being able to purchase property with at least 20% down, ideally in a location that has started seeing an increase in demand. The second is to have tenants living on that property paying the mortgage.
What is the 8% rule in real estate? ›
The 8% rule is a simple guideline that helps you calculate the total cost of home ownership on a monthly basis. Here's how it works: Property Taxes: In the United States, the average property tax rate is 1.11% across all residential real estate. So, for a $500,000 home, you'd pay $5,500 in property taxes every year.
Typically, mortgage lenders want you to put 20 percent down on a home purchase because it lowers their lending risk. It's also a rule that most programs charge mortgage insurance if you put less than 20 percent down (though some loans avoid this).
What is the 1% rule for cash flow? ›
According to this rule, after purchasing and rehabbing the property, the monthly rent should be at least 1% of the total purchase price, including the cost of repairs. This guideline helps ensure that the rental income covers the mortgage payment and operating expenses, leading to positive cash flow.
What is the rule of 40 rent? ›
The “40x” rent rule states that your annual gross income should be around 40 times your monthly rent payment. For example, if your annual pre-tax income is $50,000, the rule suggests your monthly rent should be no more than $1,250 — that's $50,000 divided by 40.
What is the 1% rule for rent to price ratio? ›
According to the 1% rule, rental income should be equal to or greater than the purchase price. Take the purchase price of the property plus expenses for necessary repairs and times by 1% to determine whether rent to value ratios are healthy or not. Rental markets dictate rental values.
What is the 50% rule in real estate? ›
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
