## What Is the 1% Rule?

**The “one percent rule” (or, “1% rule”) is a commonly used guideline for real estate investing. It recommends that monthly rent should be set at 1% of total investment. It helps ensure that a rental property generates positive cashflow (or at least breaks even) on a monthly basis.**

The 1% rule can be applied to both residential and commercial real estate investing.

While it is a concept to be understood more than a hard-and-fast rule, it is a useful concept nonetheless.

So how do you use it?

## How To Use the 1% Rule

The one percent rule calculation is simple.

Start with your total investment cost. This includes the total payoff value of your mortgage plus the cost of repairs and/or upgrades. Multiply it by .01. The result is your suggested monthly rent.

Total investment * .01 = monthly rent

For example:

You have a mortgage with a payoff value of $90,000 and anticipate $10,000 for repairs, bringing your total investment to $100,000. 1% of 100,000 is 1,000. Therefore, you need to charge at least $1,000 in rent to abide by the one percent rule.

Of course, this is only a rudimentary tool to help make your P&L work. You should adjust it based on your specific strategy. That’s why the 2% rule exists—the same rule with double the rent.

Moreover, passing the 1 percent rule doesn’t necessarily make a property a good investment. Nor does failing the 1 percent rule automatically make a property a bad investment.

It is a very basic calculation, which is both a benefit and a drawback.

### Pros: When to Use the 1% Rule

The 1% rule has two main uses.

You might assume that setting rent would be one of them. But it isn’t. That’s because the one percent rule is best applied before you purchase a property.

It’s strengths are:

**Filtering Properties**– The one percent rule can be used as a broad filter when prospecting for investment opportunities. Apply it to the median rent in your target location to set a limit on your total investment costs. Better yet, use it in tandem with other rules or metrics like the gross rent multiplier, 50% rule, or your own unique calculations.**Benchmarking Loan Terms**– The one percent rule can help you clarify your targets for loan negotiations. Use it to set the bar for total payoff value and payment schedule terms. Needless to say, your loan terms can make or break the success of your investment.

As far as real estate analysis methods are concerned, you could certainly do worse.

Still, the one percent rule is neither perfect nor comprehensive.

### Cons: When Not to Use the 1% Rule

There are certain situations where it just isn’t all that useful.

The goal of the 1% rule is to set a monthly “break even” level and ideally ensure positive monthly cashflow. However, 1% may not always suffice. 1.2% or .8% may fit your needs better.

Moreover, it doesn’t work that well with certain strategies. For instance, house flippers may be better off throwing the 1% rule out in favor of the 70% rule.

Beyond that, it’s weaknesses are fairly distinct:

**Ongoing Expenses**– The core formula for the one percent rule is fairly limited. More sophisticated investors may choose to factor in expected vacancy rates, property taxes, maintenance costs, or other operating expenses. However, this may also make it more difficult to find real estate that passes the 1% test.**Lacks Context**– The one percent rule is inflexible and somewhat narrow in its application. In its textbook form, it does not take into account things like the local real estate market, the real estate market cycle, interest rates, or the regulatory environment. Under various circumstances, it may become obsolete or in need of very heavy modification.

How well the one percent works for you is highly dependent on the situation and your strategy.

Regardless, understanding how the 1% rule works is part of a strong foundation. From here, you should be able to use it to develop your own system to estimate month-to-month cashflow on any given property.