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.
Why does the 1% rule work 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.
Does the 1 percent rule include utilities? ›
ALSO SEE: What is the 50% Rule? The shortfall of such a simplistic metric is accuracy. The 1% rule's weakness is that it does not account for the many additional costs involved with an investment property, such as maintenance costs, insurance, property taxes, HOA fees, vacancy rates, and utilities.
What is the 1% rule for cap rates? ›
It states that the monthly rent of a property should be equal to or greater than 1% of the total investment in the property. The 1% rule can help you quickly screen properties and compare them based on their rental income potential.
Does the 1% rule in real estate still work? ›
The 1% rule used to be a pretty good first metric to determine whether a property would likely make a good investment. With currently inflated home prices, the 1% rule no longer applies.
What is the 1% rule in multifamily? ›
For example, if a property costs $100,000, the monthly rent should be at least $1,000. This rule of thumb is based on the idea that a property that generates at least 1% of its purchase price in monthly rent is likely to be cash flow positive.
How to calculate the 1% rule? ›
Calculating the 1% rule is simple. Divide the property purchase price by 100 to calculate 1% of the value of the property. According to the 1% rule, this will give you the minimum you should charge in monthly rent.
What is the golden rule in real estate? ›
It was during this period that Corcoran developed what she calls her "golden rule" of real estate investing. This rule calls for investors to put 20% down on properties and then get tenants whose rent payments cover the mortgage.
What is the 10 to 1 rule in real estate? ›
The 100 to 10 to 3 to 1 rule is a guideline for real estate investors that suggests a property's monthly rent should be at least 1% of its total purchase price.
The 1% Rule asserts that success doesn't come overnight but is the culmination of consistent, small steps taken every day. By improving just 1% every day, one can achieve exponential growth over time. The rule is about building habits and embracing the journey, rather than being fixated on the end goal.
How much profit should you make on a rental property? ›
Generally, a good ROI for rental property is considered to be around 8 to 12% or higher. However, many investors aim for even higher returns. It's important to remember that ROI isn't the only factor to consider while evaluating the profitability of a rental property investment.
What is the Brrrr method? ›
What is BRRRR, and what does it stand for? Letter by letter, BRRRR stands for “Buy, rehab, rent, refinance and repeat.” It's like flipping, but instead of selling the property after renovation, you rent it out with an eye on long-term appreciation.
What is a good cap rate in real estate? ›
Market analysts say an ideal cap rate is between five and 10 percent; the exact number will depend on the property type and location. In comparison, a cap rate lower than five percent denotes lesser risk but a more extended period to recover an investment.
Is 7.5% a good cap rate? ›
Generally, a cap rate of 8-10% is considered a good cap rate for a rental property, however, cap rates can vary significantly depending on the market and the type of property. For example, a cap rate of 6-7% may be considered good for a multifamily property in a high-demand market.
What is the formula for cap rate in real estate? ›
The formula for Cap Rate is equal to Net Operating Income (NOI) divided by the current market value of the asset. Where: Net operating income is the annual income generated by the property after deducting all expenses that are incurred from operations including managing the property and paying taxes.
How to calculate the 1 percent rule? ›
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. For example, let's say you're looking at a duplex home listed at $250,000 that's in good condition and doesn't need any immediate repairs.
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.
