The 1% rule is a quick screen for rental properties. It says the monthly rent should be at least 1% of the purchase price. If a listing misses by a wide margin, it will probably struggle to produce positive cash flow with a typical mortgage.
Monthly rent ÷ purchase price ≥ 1%
Take a house listed at $200,000. To pass, it needs to rent for at least $2,000 a month. If similar houses nearby rent for $1,700, the ratio is $1,700 ÷ $200,000 = 0.85%, so it falls short. At that rent, you would need to pay $170,000 or less for it to pass. If the house needs $20,000 of repairs before a tenant can move in, many investors add that to the price, which makes the total $220,000 and the target rent $2,200.
The rule only compares rent with price. It knows nothing about property taxes, insurance, interest rates or the condition of the roof, so a house can pass and still lose money every month, and a house that fails can still be a reasonable buy. In many higher-priced markets almost nothing passes. Use the rule to sort a long list of listings, then run the survivors through a full rental analysis with real expenses before you make an offer.