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% rule example? ›
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.
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 a 1 percent payment plan? ›
What is a 1% payment plan? The 1% payment plan enables you to buy a house in Dubai, paying only 1% monthly of total price. This implies that you don't need a huge upfront payment, and there are no high-interest rates or charges.
What is the formula for the 1% rule? ›
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.
How do you implement the 1% rule? ›
To apply the 1% rule, you can either multiply the property's purchase price by 1% or move the decimal point in the purchase price two places to the left. The result should be the minimum you consider charging in monthly rent.
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.
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.
How do you use the 1 rule in real estate? ›
The 1% rule asks investors to add the property price plus the cost of necessary repairs, then multiply the total by 1%. Ideally, you'll charge monthly rent above that baseline, with a mortgage payment that totals less than the figure.
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 80% rule in 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.
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.
What is the 1 percent rule? ›
The 1% rule states that a rental property's income should be at least 1% of the property's 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 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 1% rule in Brrrr? ›
The 1% rule in BRRRR investing is a quick method to determine how much rent to charge as a landlord. If you follow the 1% rule, the rent you charge your potential tenants should equal at least 1% of what you paid for the house, including renovation costs, repairs, and other improvements.
What is the #1 rule? ›
1 Rule real estate FAQs
It states that the monthly rent of a rental property should be at least 1% of the property's purchase price.
What is the example of divisibility rule of 1? ›
Divisibility Rule of 1
Any number divided by 1 will give the number itself, irrespective of how large the number is. For example, 3 is divisible by 1 and 3000 is also divisible by 1 completely.
What are some quotes from the 1% rule? ›
"If you can get 1% better each day for one year, you'll end up 37 times better by the time you're done."
What is Rule 1 investing? ›
It comes from a Warren Buffet idea that Phil Town expounds in Rule #1: Find a wonderful business, determine its value, buy its stock for half that value, and repeat until rich. These blinks enable you to do just that. They teach you the key indicators for that right, wonderful business that could change your life.
