By the CalcLedger editorial team · Updated September 2026 · Examples use illustrative rates · How we calculate
When real estate investors look at dozens of listings, they need a fast way to decide which ones deserve a closer look. The most famous shortcut is the 1% rule. It's useful, but it was popular when mortgage rates were much lower, and at today's rates it can be misleading on its own.
What the 1% rule says
A $200,000 property should rent for at least $2,000 a month. A $350,000 property should rent for at least $3,500. If a property's rent is well below 1%, the rule says it will probably struggle to cover its mortgage and expenses.
Some investors include expected repair costs in the price: a $180,000 house needing $20,000 of work is treated as a $200,000 purchase.
Why the rule is useful
It lets you quickly screen out properties where the rent is too low relative to the price, without building a full spreadsheet. In expensive coastal cities, few properties come close to 1%, which tells you something real: buying there is a bet on appreciation, not on monthly cash flow.
Testing it: a $200,000 rental that passes the 1% rule
Suppose you buy a $200,000 house that rents for exactly $2,000 a month. You put 25% down, which is common for investment property loans, and borrow $150,000 at an illustrative 7% for 30 years. Investment property rates usually run higher than rates on a home you live in.
- Mortgage principal and interest: about $998 a month.
- Operating expenses: using the common 50% rule, which estimates that taxes, insurance, repairs, vacancy, property management, and capital expenses together eat about half the rent, that's $1,000 a month.
- Net operating income (NOI): $2,000 − $1,000 = $1,000 a month.
- Cash flow after the mortgage: $1,000 − $998 = about $2 a month.
The property passes the 1% rule and still roughly breaks even. With about $56,000 invested ($50,000 down plus about $6,000 in closing costs), the cash-on-cash return is close to zero. The cap rate, which ignores financing, is 6% ($12,000 NOI ÷ $200,000).
What if it misses the 1% rule?
Same house, but it rents for $1,600, which is 0.8% of the price. NOI falls to $800 a month, and after the $998 mortgage payment, you're losing about $198 every month. The cap rate drops to 4.8%.
So at today's rates, the 1% rule works better as a minimum than as a target. Meeting it doesn't guarantee positive cash flow. Falling well short of it almost guarantees negative cash flow unless you pay cash or make a very large down payment.
What the 1% rule ignores
- Interest rates. At 4%, the same $150,000 loan costs about $716 a month, and the example above would cash-flow roughly $280 a month. The rule is the same, but the result is very different.
- Property taxes and insurance, which vary enormously by state and county. Texas and New Jersey property taxes, or Florida insurance, can break a deal that passes the 1% rule.
- The property's age and condition. An older house may need a new roof or HVAC system soon.
- Appreciation and loan paydown. Investors also earn from rising home values and from tenants paying down the mortgage, which the rule doesn't capture at all. See our guide to cap rate vs. cash-on-cash return.
- Vacancy. A property that sits empty for two months a year loses about 17% of its annual rent.
A better screening process
- Use the 1% rule as a first filter. Skip properties far below it unless you have a clear reason, such as strong expected appreciation.
- Apply the 50% rule to estimate NOI quickly.
- Subtract your actual mortgage payment at the rate you can really get. Ask a lender for an investment property quote.
- For properties that still look good, build a detailed estimate using real property tax records, an insurance quote, rents from comparable listings, and an inspection.
- Look at cash-on-cash return, not just cash flow, to compare against other uses of your money.
Other rules of thumb investors use
- 50% rule: operating expenses, not including the mortgage, run about half of rent.
- 2% rule: a stricter version for high cash-flow markets. These properties exist mostly in lower-priced areas and often come with higher risk, vacancy, and repair costs.
- Cash flow per door: many investors want a minimum, such as $100 to $200 a month per unit, after all expenses and reserves.
Run a real analysis
The rental property ROI calculator takes price, rent, down payment, rate, and expenses, and calculates cash flow, cap rate, and cash-on-cash return. Test different rents and rates to see how much room the deal has before it turns negative. To check the mortgage side on its own, use the mortgage calculator.