How the one percent rule works
By Jude Wallis
The one percent rule is a screen, not a valuation. Divide monthly rent by purchase price: $2,400 on a $240,000 property is 1 percent, so it passes. $2,000 of rent on a $300,000 property is 0.67 percent, so it does not.
Monthly rent / price
1.00%
Meets the one percent screen on this price.
- Monthly rent
- $2,400.00
- Price
- $240,000.00
- Rent / price
- 1.00%
- Meets one percent
- Yes
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In short
- The ratio is monthly rent over price: $2,400 divided by $240,000 is 1 percent.
- It is a first-pass filter that takes seconds, which is the only reason it exists.
- A property at $2,000 of rent on $300,000 scores 0.67 percent and fails the screen without being a bad property.
- The rule says nothing about expenses, financing, vacancy or condition, so nothing it passes is yet a deal.
A screen is not an analysis
Investors look at far more properties than they buy, and the point of a screen is to spend one second rather than one hour on the ones that cannot work. Monthly rent divided by price gives $2,400 over $240,000, which is exactly 1 percent, so this property earns the longer look.
That is the entire claim. Nothing about the ratio establishes that the property produces cash, because a screen with two inputs cannot know about the roof, the service charge, the local void rate or the mortgage.
Where the one percent came from
The threshold is a rule of thumb from markets where monthly operating costs and debt service historically consumed roughly half of gross rent. One percent of price in rent left enough over to cover both and still return something. It is a memory of a market, not a law of arithmetic.
Which is why it travels badly. In expensive coastal markets almost nothing reaches one percent, and applying the rule there screens out the entire market. In cheaper markets many properties clear it, and the screen stops discriminating. Use it as calibrated to the market you are actually buying in.
The ratios that come after it
Once a property passes, the real work starts with income rather than rent. Net operating income subtracts vacancy and operating expenses from gross rent, and the NOI calculator runs it. Divide that by price for a cap rate, and divide it by debt service for coverage.
Each of those tells you something the screen cannot. Cap rate against DSCR shows how the same income answers a buyer's question and a lender's question differently, and the gross rent multiplier calculator is the same idea as the one percent rule expressed as a multiple.
Using it well
Treat 1 percent as a sorting threshold you set yourself, adjusted for your market, and treat a failure as a reason to move on quickly rather than a verdict on the property. Then check the properties that pass with income and financing figures, because that is where a deal is either made or unmade. The one percent rule calculator gives the ratio, and how cap rates work is the next number to reach for. This is educational material, not financial advice.
Worked examples
\$2,400 of rent on a \$240,000 property
A rental is priced at $240,000 and rents for $2,400 a month. Does it pass the one percent screen?
- Divide monthly rent by price: 2,400 over 240,000.
- That is 0.01, which is 1 percent.
It reaches exactly 1 percent, so the property passes the screen and earns a proper analysis.
A pricier property with lower rent
A second property costs $300,000 and rents for $2,000 a month.
- Divide 2,000 by 300,000.
- The result is 0.67 percent, a third short of the threshold.
It scores 0.67 percent and fails the screen. Rent would have to reach 1 percent of the higher price to pass.
Common questions
Should the price include renovation costs?
Yes, if you want the screen to mean anything. All-in cost is the denominator that matches the rent you will actually charge.
Is a property that fails the screen a bad buy?
Not necessarily. Appreciation, low expenses or a strong location can carry a deal the screen rejects.
Does it work outside residential property?
Rarely. Commercial leases pass different costs to tenants, so the ratio is not comparable.
Is this financial advice?
No. It is educational material about a property screening ratio.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.