Understanding the 1% rule for real estate investors
The 1 percent rule is a real estate investment guideline that lets investors quickly estimate the minimum monthly rent they must charge to break even (at minimum) on a particular property
The rule suggests that the rent on an investment property should be equal to or greater than 1 percent of the property’s sale price.
To calculate monthly rent using the 1 percent rule, simply multiply the home’s purchase price by 1 percent. If repairs are needed, add the repair costs in with the purchase price.
There are some limitations to the 1 percent rule. For example, while it does factor in any initial repairs that the property needs, it doesn’t consider the ongoing costs of homeownership.
Be sure to factor in your loan terms and what your monthly mortgage payment will be before investing in any property.
As a property owner, you’ll have ongoing upkeep costs like lawn care, HVAC maintenance and pest control.
You’re responsible for paying your home’s annual property taxes, and you’ll need to purchase insurance for your property — specifically landlord insurance, which is typically more expensive than standard homeowners insurance.
If the property is in a community managed by an HOA, you’ll need to pay regular dues.
The 1 percent rule may not apply in particularly pricey markets, like San Francisco and New York City.
A few other common real estate guides based on percentages that might be useful:
The 2 percent rule: The same idea as the 1 percent rule, just a bit stricter.
The 28 percent rule: This guideline recommends that you spend, at most, 28 percent of your gross monthly income on your mortgage payment. Many lenders consider this when reviewing your application.
The 70 percent rule: The 70 percent rule helps house flippers determine how much they can spend on a property based on its after-repair value (ARV) — the home’s expected value after renovations are complete.