How the 1% rule works
Divide the monthly rent by the total cost to buy and fix the property; if the result is 1% or more, the property passes the screen.
| All-in price | 1% rule | 2% rule |
|---|---|---|
| $100,000 | $1,000 | $2,000 |
| $150,000 | $1,500 | $3,000 |
| $200,000 | $2,000 | $4,000 |
| $300,000 | $3,000 | $6,000 |
| $400,000 | $4,000 | $8,000 |
| $600,000 | $6,000 | $12,000 |
A 1% monthly ratio is a 12% gross annual yield: twelve months of rent divided by the price.[1] The rental yield calculator and the gross rent multiplier on the rental property value calculator express the same relationship in other terms (1% a month is a GRM of about 8.3).
The 50% rule
The 50% rule assumes that operating expenses, vacancy included, will take about half of the rent, leaving the other half for the mortgage and cash flow. In the worksheet, half of $1,850 is $925; after a $923 principal-and-interest payment, the rough cash flow is $2 a month.
The same house run through an itemized statement (6% vacancy, $2,900 taxes, $1,400 insurance, 8% maintenance, 8% reserves, 9% management) has operating costs of 44% of gross rent and cash flow of $5 a month. When the 50% estimate and the itemized result disagree, trust the itemized one and find out which costs explain the gap.
No official source behind these rules
We looked for a government, agency or university source for the 1%, 2%, 50% and 70% rules and did not find one: they are heuristics passed between investors. The closest official figures are lending haircuts, which serve a different purpose:
- When rent helps a borrower qualify for a mortgage on a 1–4 unit property, Fannie Mae counts 75% of gross monthly rent.[2]
- For a one-unit short-term rental, it counts 50% and says the other half covers vacancy losses and maintenance.[3]
- For apartment buildings, Fannie Mae's underwriting sets minimums for individual lines, such as vacancy of at least 5% of gross potential rent and management of at least 3% of income, rather than a single expense percentage.[4]
Why the rules misleadThe 1% rule ignores taxes, insurance and interest rates, all of which vary widely by location; a property can pass in a low-tax area and fail in a high-tax one at the same ratio. The 50% rule ignores the age of the building and who pays utilities. Use them to sort listings quickly, then run the rental property calculator on anything that passes.
The 70% rule, for flips and BRRRR
A third rule of thumb caps the purchase price at 70% of the after-repair value minus repair costs. It is also unofficial. The BRRRR calculator reports it next to the actual refinance math, which is what decides how much cash stays in the deal.
Frequently asked questions
What is the 1% rule in real estate?
A screening rule of thumb: monthly rent should be at least 1% of the purchase price plus repairs. A $200,000 house would need $2,000 a month.
Is the 1% rule realistic?
In many high-price markets few properties meet it, and in others properties that meet it carry higher costs or risk. It is a quick filter, not a measure of return.
What is the 50% rule in real estate?
An estimate that operating expenses and vacancy will take about half of the rent. Subtract the mortgage payment from the other half for a rough cash flow.
What is the 2% rule in real estate?
A stricter version of the 1% rule: monthly rent of at least 2% of the all-in price. It is rarely met outside low-price areas.