The 1% rule says a rental property's monthly rent should be at least 1% of its purchase price. The formula is monthly rent ÷ purchase price, and a result of 1% or more passes: a $400,000 house should rent for at least $4,000 a month.
Investors use it to sort listings in seconds and spend their real analysis time on the ones that pass. It is a filter, not a verdict: it ignores every expense and the cost of the loan.
How does the 1% rule work?
Divide the expected monthly rent by the price. Some investors divide by the all-in cost instead (the price plus closing costs and any repairs needed to rent it), which is stricter and closer to the money you actually spend.
| Purchase price | Rent needed to pass | Rent at 0.75% |
|---|---|---|
| $200,000 | $2,000 a month | $1,500 a month |
| $300,000 | $3,000 a month | $2,250 a month |
| $400,000 | $4,000 a month | $3,000 a month |
| $500,000 | $5,000 a month | $3,750 a month |
The logic behind it: at 1% of the price, the rent usually leaves enough after the mortgage and running costs to produce some cash flow. That held when rates were low and prices were lower. It holds less often now, for reasons worth knowing before you lean on it.
The sample deal, run through the 1% rule
The 1% rule on one $400,000 house, both ways
This is the example deal used across these guides, set out in full in how to analyze a rental property: a $400,000 single-family house, 25% down, an example 7.5% rate over 30 years.
- As a long-term rental at $3,000 a month: $3,000 ÷ $400,000 = 0.75%. It fails. The full analysis agrees: after every expense and the loan, it loses $4,507.68 a year.
- As a short-term rental grossing $72,000 a year, an average of $6,000 a month: $6,000 ÷ $400,000 = 1.5%. It passes easily. The full analysis is less impressed: it makes $2,500.32 a year, because its running costs, led by the platform fee, management, utilities and supplies, eat about 62% of the revenue.
- At a price that passes: the same $3,000 rent clears 1% at $300,000. With 25% down, taxes scaled to that price and every other cost the same, the loan payments are $18,878.76 a year, NOI is $21,864 and cash flow is $2,985.24, a 3.55% return on $84,000 invested.
So the rule sorted the long-term version correctly, flattered the short-term version, and at the passing price pointed at a deal that works, modestly.
Why the 1% rule fails as often as it works
It ignores the costs that vary most
Two houses at the same price and rent can be very different deals. Effective property tax rates run from about 0.3% of a home's value in the lowest-tax state to about 1.9% in the highest. On a $400,000 house that is $1,200 a year against $7,600, a difference of more than $500 every month that the 1% rule never sees. Insurance swings as much in storm and wildfire country, and HOA dues can add hundreds a month.
It ignores the cost of money
At an example 7.5% rate with 25% down, principal and interest alone come to 0.52% of the price every month. A house that just meets 1% hands more than half its rent to the loan before taxes, insurance or a single repair. When rates were far lower, the same rent left much more behind. The 30-year fixed average for home loans was 7.24% at the end of October 2026, and investor loans usually price above it.
Cheap houses pass more often, for a reason
Investors on forums report the same pattern: 1% deals are common only in lower-priced markets and neighborhoods, and those houses tend to be older, need more repairs, turn over tenants more often and appreciate more slowly. A pass can mean a good deal, or a house whose costs the rule cannot see.
Short-term revenue is not rent
Applied to a short-term rental's gross bookings, the rule almost always passes, because that revenue carries the costs of running a small hotel. Use it only on long-term rent, and judge short-term rentals on their own numbers. How to estimate Airbnb income covers what comes off the top.
Appreciation markets never pass
In expensive, fast-growing markets, almost nothing reaches 1%, and investors who buy there are paying for expected growth rather than income. That is a different strategy with different risks, not a broken rule.
What is the 2% rule?
The same formula with a higher bar: monthly rent of at least 2% of the price, such as a $100,000 house renting for $2,000. Deals that meet it exist mostly at low prices, in areas where tenants, repairs and resale can all be harder. Treat a 2% listing as a prompt to ask why the rent is so high relative to the price.
What is the 50% rule?
The 50% rule estimates that a rental's operating expenses (everything except the mortgage) will run about half of its gross rent over time. Half the rent is your estimated net operating income, and the mortgage comes out of that.
On the sample house as a long-term rental: half of $36,000 is $18,000 of estimated NOI. Working through every expense line, as net operating income does, gives $20,664, because the real costs, vacancy included, run 42.6% of gross rent. Both figures fall short of the $25,171.68 a year of loan payments.
As a short-term rental the rule misleads the other way: half of $72,000 suggests $36,000 of NOI, but the full costs leave $27,672, because they run about 62% of revenue. Use 50% only for long-term rentals, and only until you have real numbers.
What is the 70% rule?
The 70% rule is for buying a house to renovate, not for judging rent. Your maximum offer is 70% of the after-repair value (ARV) minus the cost of repairs. The other 30% pays for financing, holding, selling and profit.
If a run-down version of the sample house would be worth $400,000 once renovated and needed $30,000 of work, the ceiling is 70% of $400,000, which is $280,000, minus $30,000: an offer of no more than $250,000. Investors using the BRRRR method often use the same ceiling, because the refinance after the work depends on the house being worth well more than they put in.
Other quick screens
- Gross rent multiplier (GRM): price ÷ annual rent. The sample house is $400,000 ÷ $36,000 = 11.11 as a long-term rental. Lower is cheaper relative to income. It is useful only for comparing houses in the same market.
- Gross revenue to price, for short-term rentals: some investors look for a year's gross bookings of about 15% to 20% of the price. The sample house grosses $72,000, 18% of $400,000, and still only cash flows $2,500.32 a year with a manager.
- Cap rate: NOI ÷ price, the next step up because it counts expenses. The cash-on-cash return goes one step further and counts the loan.
Build a benchmark for your own market
A rule from a forum is someone else's market. A better screen takes an afternoon: list ten to twenty houses like the ones you would buy that rented in the last six months, with each one's rent and its recent sale price or current value. Divide rent by price for each, and you have your area's real range, perhaps 0.6% to 0.9%. A listing at the top of that range deserves a full analysis; one at the bottom needs a reason, such as a better street, a newer roof or room to add value. Redo it every few months, because rents and prices rarely move together.
How to use rules of thumb without fooling yourself
- Set the bar for your market. If nothing in a city reaches 1%, a 0.8% screen may still separate the better listings from the worse.
- Screen on the all-in cost, including repairs and closing costs, not just the list price.
- Treat a pass as "analyze this" and a fail as "it needs a reason to buy anyway."
- Run the full numbers on anything you would offer on: income, every expense, the loan, and a stress test. GoDoor's deal calculator does this on a real address.
Frequently asked questions
Is the 1% rule realistic?
In many expensive and fast-growing markets, very few houses reach it, and investors there accept 0.6% to 0.8% and rely on appreciation. In lower-priced markets it is still common, though often on older houses with higher costs. It is realistic as a screen for comparing listings within one market, not as a universal pass mark.
Does the 1% rule include taxes and insurance?
No. It compares rent with price and nothing else. Property taxes, insurance, HOA dues, vacancy, management, repairs and the mortgage are all left out, and they decide whether the property makes money. That is why two houses that both pass can end up hundreds of dollars a month apart in cash flow.
Does the 1% rule work for Airbnb and other short-term rentals?
Not well. A short-term rental's gross bookings are revenue from running a small hospitality business, with platform fees, cleaning, utilities, supplies and often a manager taken out. Almost any short-term rental passes on gross revenue. Judge one on its net operating income and cash flow instead, after a realistic estimate of nightly rates and occupancy.
Should the 1% rule use the purchase price or the total cost?
The stricter and more useful version divides rent by everything you spend to get the property rented: the price, closing costs and any repairs or updates. A $300,000 house that needs $20,000 of work should rent for at least $3,200 to pass, not $3,000, and more once its closing costs are added.
What should I use instead of the 1% rule?
Use it to filter, then run a full analysis: realistic rent, a vacancy allowance, every operating expense, the actual loan payment, and the resulting cash flow, cap rate and cash-on-cash return. Then stress-test it with lower rent and a higher rate. That takes an hour and replaces a guess with numbers you can defend.
Sources
General education, not financial, tax or legal advice. Figures are examples: rates, rules and programs change, and every lender sets its own. Last checked November 4, 2026.