Home › Guides › The 1% rule

The 1% rule for rental properties: what it is, a worked example, and when it fails

By Spruce Sheets · Updated November 14, 2026 · 4 min read

The 1% rule is one of the first shortcuts many new landlords hear: if the monthly rent is at least 1% of the price, the deal is worth a look. It is easy to remember and easy to over-trust. This guide shows the formula, works three made-up properties, and explains why a property can fail the rule and still produce cash flow — or pass it and still not cover the loan.

General information, not investment, appraisal or lending advice. The examples are made up. The 1% rule is a screening shortcut, not a standard of value and not a substitute for a full analysis of your numbers, local rents and lender requirements.

The formula

Monthly rent ÷ purchase price ≥ 1%

On a $200,000 purchase, 1% is $2,000 a month in rent. On $240,000, 1% is $2,400. If the rent you can actually collect is below that line, the property "fails" the rule.

A related shortcut is the 2% rule (rent at least 2% of the price), which is rarer in many US markets and even rougher as a test. Neither rule knows anything about taxes, insurance, vacancy, repairs, the interest rate or how much you put down.

Three worked examples

All three are single-family rentals, for illustration only. Vacancy is 5% of rent. Management is 8% of effective rent. Properties A and C are priced at $200,000 with $2,000 rent, so they pass the 1% rule exactly (1.000%). They are not the same deal.

Property A — passes the 1% rule, and the full calculation is comfortable.

	Amount
Price	$200,000
Rent	$2,000
1% test	1.000% (pass)
Loan (25% down, 7.00%, 30 years)	payment $997.95
Monthly NOI	$1,173.00
Monthly cash flow	$175.05
DSCR	1.18
Cap rate	7.04%

Property B — fails the 1% rule, but still has (thin) positive cash flow. Price $240,000, rent $2,100, so $2,100 ÷ $240,000 = 0.875%. With 25% down at 7.00% for 30 years and a standard expense set (property tax $3,000 a year, insurance $1,500, repairs and capex 5% of rent each, management 8%), monthly cash flow is $52.86 and DSCR is 1.04. The shortcut says no; the full math says the loan is just covered.

Property C — passes the 1% rule and still does not cover the loan. Same $200,000 price and $2,000 rent as A (1.000%), but a heavier cost stack and a slightly higher rate:

	Monthly amount
Rent	$2,000
1% test	1.000% (pass)
Loan ($150,000 at 7.50%, 30 years)	payment $1,048.82
Property tax	$450.00
Insurance	$200.00
Repairs	$100.00
Capex reserve	$160.00
Management	$152.00
Operating expenses	$1,062.00
NOI	$838.00
Cash flow	−$210.82
DSCR	0.80
Cap rate	5.03%

Property C "passes" 1% and still needs $210.82 a month from your pocket. The 50% rule would have guessed operating expenses of $1,000.00 (half of $2,000), which is close to the $1,062.00 here, and would still not have revealed the loan problem by itself. You need NOI and the payment, not only the rent-to-price ratio.

When the 1% rule helps — and when it misleads

Use it as a first pass on a long list of listings, to decide which ones deserve 20 minutes of real math. A property that is far below 1% in a high-tax, high-insurance area may not be worth a full worksheet if you need cash flow from day one.

Do not use it as a buy rule. It ignores:

• Property taxes and insurance, which can differ by thousands of dollars a year on similar prices.
• Interest rates and down payment, which drive DSCR and cash flow.
• Vacancy, capex and management, or the fact that you will self-manage.
• Condition. A cheap price with a new roof and a cheap price with a dead furnace are not the same 1% test.
• Appreciation or tax effects, which the rule was never meant to capture.

In some high-price markets, almost nothing passes 1%, and investors still buy using cash flow, cap rate and a long holding period. In some lower-price markets, many listings pass 1% and still have weak tenants, heavy capex or declining streets. The rule cannot see that.

How it compares with cap rate and cash-on-cash

• The 1% rule uses gross rent and price.
• Cap rate uses NOI and price, so expenses are in the picture and the loan is not.
• Cash-on-cash return uses cash flow after the loan and the cash you put in.

A property can pass 1%, show a middling cap rate and still have a negative cash-on-cash return if you borrow at a high constant. Run the three properly before you treat a "pass" as a decision.

Doing it in a spreadsheet

The test itself is one division. The useful work is replacing it with NOI, cash flow and DSCR. The free Spruce Sheets Rental Property Cash Flow Calculator does that in Excel or Google Sheets. The Rental Property Analysis Calculator compares up to five deals, so a listing that merely passes 1% can be stacked next to one that does not.

The examples are made up. This guide is not investment or lending advice. A shortcut is not an analysis.

Frequently asked questions

What is the 1% rule in real estate?

The 1% rule is a screening shortcut: monthly rent should be at least 1% of the purchase price. A $200,000 property would need $2,000 a month in rent to pass. It is not a law, a lender test or a complete analysis.

Is the 1% rule still useful?

As a first filter, sometimes. In many markets, properties that pass it are uncommon, and a property can fail the rule and still cash flow, or pass it and still lose money once taxes, insurance, vacancy and the loan are included. Use it to decide which listings deserve a full calculation, not to decide whether to buy.

What is the 50% rule for rentals?

The 50% rule is another shortcut: estimate operating expenses (excluding the mortgage) at half of the gross rent. It can be a starting point when you have no bills yet, but actual taxes, insurance and repairs vary widely, so it should be replaced with real figures as soon as you have them.

Keep reading

• How to calculate rental property cash flow, step by step
• How to calculate net operating income (NOI) on a rental property
• How to calculate cap rate on a rental property, with examples