What Is the One Percent Rule?
The one percent rule, sometimes stylized as the "1% rule," is used to determine if the monthly rent earned from a piece of investment property will exceed that property's monthly mortgage payment. The goal of the rule is to ensure that the rent will be greater than or—at worst—equal to the mortgage payment, so the investor at least breaks even on the property.
Key Takeaways:
- The rent charged should be equal to or greater than the investor's mortgage payment to ensure that they at least break even on the property.
- Multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent.
- Ideally, an investor should seek a mortgage loan with monthly payments of less than the 1% figure.
The one percent rule can provide a baseline for establishing the level of rent that commercial property owners charge on real estate space. This rent level can apply to all types of tenants in both residential and commercial real estate properties.
Purchasing a piece of property for investment requires a thorough analysis of numerous factors. The one percent rule is just one measurement tool that can help an investor gauge the risk and potential gain that might be achieved by investing in a property.
How the One Percent Rule Works
This simple calculation multiplies the purchase price of the property plus any necessary repairs by 1%. The result is a base level of monthly rent. It's also compared to the potential monthly mortgage payment to give the owner a better understanding of the property’s monthly cash flow.
This rule is only used for quick estimation because it doesn't take into account other costs associated with a piece of property, such as upkeep, insurance, and taxes.
Example of the One Percent Rule
An investor is looking to obtain a mortgage loan on a rental property with a total payoff value of $200,000. Using the one percent rule, the owner would calculate a $2,000 monthly rent payment: $200,000 multiplied by 1%. In this case, the investor would seek a mortgage loan with monthly payments of less than and absolutely no more than $2,000.
The One Percent Rule vs. Other Types of Calculations
The one percent rule also helps give an investor a base point from which to consider other factors regarding the ownership of a property. A second important calculation is the gross rent multiplier, which uses the monthly rent level to determine the amount of time it will take to pay off the investment. This calculation is achieved by dividing the total borrowed value by the monthly rent.
In the example of the home with a value of $200,000, the investor would divide $200,000 by $2,000. This gives the investor a 100-month payoff period, which translates to a little over 8.3 years. Investors can also use the gross rent multiplier when considering the payment schedule terms of a loan taken for the property.
The 70% rule implies that an investor should not pay more than 70% of the property's estimated value after repairs fewer costs.
Special Considerations
In calculating the gross rent multiplier, a buyer must also consider the rental rates in the area in which the property is located. If the standard rate for rent in the neighborhood is less than $2,000 for the buyer in this example, the investor might have to consider decreasing the rent to ensure that they find a tenant.
Another important factor to consider is maintenance on the property. The property owner is responsible for upkeep and repairs. While a deposit might cover substantial damages, it's also important for the owner to budget a specified amount of the rent for savings toward maintenance. This can contribute to profits if it's unused, and the money would be available when any maintenance needs arise.
Overall, investing in real estate can be lucrative for long-term investors. The base rent that an owner charges on any type of property sets the level of payments expected by tenants. Owners typically raise rent annually to manage inflation and other costs associated with the property, but the base rate is an important level that determines the overall return on an investment.
FAQs
The 1% rule states that a rental property's income should be at least 1% of the purchase price. For example, if a rental property is purchased for $200,000, the monthly rental income should be at least $2,000.
What is the 1 percent rule in real estate example? ›
Examples Of The 1% Rule
Let's say you need to make about $10,000 in repairs before renting the home. Add the cost of repairs to the home's purchase price for a total of $160,000. Then multiply the total by 1%. You'll get a $1,600 minimum monthly rental rate.
Why does the 1% rule work in real estate? ›
How the One Percent Rule Works. This simple calculation multiplies the purchase price of the property plus any necessary repairs by 1%. The result is a base level of monthly rent. It's also compared to the potential monthly mortgage payment to give the owner a better understanding of the property's monthly cash flow.
What is the 4 3 2 1 rule in real estate? ›
Analyzing the 4-3-2-1 Rule in Real Estate
This rule outlines the ideal financial outcomes for a rental property. It suggests that for every rental property, investors should aim for a minimum of 4 properties to achieve financial stability, 3 of those properties should be debt-free, generating consistent income.
What is the 1% rule for no properties meet? ›
Ultimately, real estate's 1% rule states that the gross monthly rent should equal or exceed 1% of the purchase price of a property. If this condition is met, you can expect that the property is likely to yield a positive cash flow.
What is the golden rule in real estate? ›
Corcoran's Golden Rule of real estate investing consists of two main parts. The first is being able to purchase property with at least 20% down, ideally in a location that has started seeing an increase in demand. The second is to have tenants living on that property paying the mortgage.
What is the 1% rule in habits? ›
The Power of the 1% Rule. Simply put, 1% change each day will add up over the course of your season. 1% is all you need to make a new habit stick. If you relax and give yourself permission to only improve a little each day, then you will begin to see big strides towards your goal.
What is the 7 rule in real estate? ›
In fact, in marketing, there is a rule that people need to hear your message 7 times before they start to see you as a service provider. Therefore, if you have only had a few conversations with the person that listed with someone else, then chances are, they don't even know you are in real estate.
What is the 90 10 rule in real estate? ›
This concept shows that if you have 10 tasks that are 90% complete, you've essentially accomplished nothing. For some real estate professionals, this can be the crux of their business. It also may mean the difference between success and failure for them.
What is the 80% rule in real estate? ›
What is the 80/20 Rule exactly? It's the idea that 80% of outcomes are driven from 20% of the input or effort in any given situation. What does this mean for a real estate professional? Making more money in real estate is directly tied to focusing your personal energy on the most high value areas of your business.
The 1% rule in BRRRR investing is a quick method to determine how much rent to charge as a landlord. If you follow the 1% rule, the rent you charge your potential tenants should equal at least 1% of what you paid for the house, including renovation costs, repairs, and other improvements.
What is the 2% rule in real estate? ›
Applied to real estate, the 2% rule advises that for an investment property to have a positive cash flow, the monthly rent should be equal to or greater than two percent of the purchase price.
What is the BRRRR method? ›
What is BRRRR, and what does it stand for? Letter by letter, BRRRR stands for “Buy, rehab, rent, refinance and repeat.” It's like flipping, but instead of selling the property after renovation, you rent it out with an eye on long-term appreciation.
Is the 2% rule in real estate realistic? ›
These days, many real estate experts completely disregard the 1 percent and 2 percent rules. The markets where properties meet the rule criteria usually aren't located in the best neighborhoods. And to meet the 2 percent rule, rental properties must be on the less expensive end.
What is the 7% rule in real estate? ›
The top 7% are hustlers. If they don't know something, they'll learn it. If the heat is on, they'll put in the extra hours to make it happen. You don't have to know everything, everyone, have all the money, or talent, but if you'll apply those two principles, you'll do very well in real estate.
What is the 80 20 rule real estate? ›
What is the 80/20 Rule exactly? It's the idea that 80% of outcomes are driven from 20% of the input or effort in any given situation. What does this mean for a real estate professional? Making more money in real estate is directly tied to focusing your personal energy on the most high value areas of your business.
What is the 50 rule in real estate example? ›
If you have a rental property generating $30,000 in annual gross rent, the 50% rule says you will spend approximately $15,000 in operating expenses, leaving $15,000 as the net operating income. However, it's important to note that the 50% rule doesn't account for all expenses.
