The 1% rule formula
Rent-to-price ratio = monthly rent ÷ purchase price
If the ratio is 1% or higher, the property passes. A $240,000 house needs to rent for at least $2,400 a month. If it rents for $2,150, the ratio is 0.90%, and to pass at that rent you would need to buy it for $215,000 or less.
What the rule is for
The 1% rule exists to save time. When you are scrolling through fifty listings, it tells you which five might cash flow and deserve a real analysis. It works because rent has to cover a mortgage, taxes, insurance, repairs and vacancy, and at typical costs that takes roughly 1% of the price each month.
Where it breaks down
- Interest rates. The rule was popularized when mortgage rates were lower. At higher rates, a property can pass and still lose money every month.
- Taxes and insurance. High-tax or high-insurance areas need well over 1% to break even.
- Expensive markets. In many coastal cities almost nothing passes, and investors there buy for appreciation instead.
- Condition. The rule compares rent with the price alone. If the house needs work, many investors add the rehab cost to the price before they divide.
Treat a pass as permission to run the full numbers, not as a verdict.