One percent rule calculator

The fraction mixes periods on purpose: one month of rent over the entire purchase price. $2,400 over $240,000 is 1 percent, which is the level the rule is named after. Anything above screens as promising, anything below screens as thin.

The period mismatch is the thing to keep straight. Putting annual rent on top gives 12 percent and looks like a triumph. The rule is defined on monthly rent, and comparing an annual figure to a 1 percent threshold is comparing two different measures.

The point of the rule is speed. It takes two numbers from a listing and sorts twenty properties in a minute, which is what a first pass is for. What it does not do is price anything, because it has no view on operating costs, on rates, or on how the property is financed.

The next passes are the ones that decide. NOI puts the costs in, cap rate turns income into a value, and DSCR checks the loan against the income. The one percent rule just decides which properties are worth that work.

One percent is a rule of thumb, not a law of rents. In expensive markets almost nothing reaches it, and 0.75 percent, as in the second example, may be the local ceiling rather than a warning. In cheaper markets 1 percent is common and 1.5 percent exists.

It is also sensitive to rates: at high borrowing rates a property needs more rent per dollar of price to work at all, so the informal threshold drifts up. The gross rent multiplier is the same screen written as a multiple rather than a percentage.

Two inputs, one ratio, one purpose: sorting a list of properties by rent per dollar of price. Use it to choose what to analyse, then let a full income analysis decide. How gross rent multiplier works covers the sibling ratio, and cap rate is the yield version. This is educational material, not financial advice.