The 1% rule says a rental is worth a closer look if its monthly rent is at least 1% of the price. A $250,000 house should rent for $2,500 a month.
The rule compares two numbers, rent and price. It ignores every cost that decides whether a house pays you each month or costs you.
What does the 1% rule get right?
It’s fast. You can run it in your head on a listing page, and it throws out houses where the rent is nowhere near the price. When a $400,000 house rents for $2,000, it takes a large down payment or an unusually cheap loan to make it pay.
That’s worth something when you’re scrolling through fifty listings on a Sunday night.
What does the 1% rule leave out?
Rent is only the top line. Before any of it reaches you, it pays for:
- the mortgage
- property taxes
- insurance
- the months the house sits empty
- repairs, plus money set aside for big ones like a roof or a furnace
- a property manager, if you use one
The rule treats all of those as if they cost the same everywhere. They don’t. Property taxes and insurance in particular swing widely from one county to the next.
Two houses that both pass the 1% rule
Take two houses at the same price with the same rent. Both pass the 1% rule exactly. The only difference is where they sit: House B is in a county with a higher tax rate and a costlier insurance quote.
| House A | House B | |
|---|---|---|
| Rent | $2,500 | $2,500 |
| Mortgage | −$1,331 | −$1,331 |
| Property taxes | −$250 | −$500 |
| Insurance | −$150 | −$350 |
| Empty months, repairs and big repairs (15% of rent) | −$375 | −$375 |
| Property management (10% of rent) | −$250 | −$250 |
| Cash flow each month | +$144 | −$306 |
Both use the same loan: 20% down on a 30-year mortgage at 7%. These are example figures, not a forecast for any market.
House A leaves you $144 a month. House B takes $306 a month out of your pocket. The 1% rule rated them the same.
What should you check instead?
Use the rule to sort listings. Then check three things before you trust a house that passes:
- Cash flow after every cost. Rent minus the mortgage, taxes, insurance, empty months, repairs and management. It’s the number that lands in your bank account.
- The tax bill you will pay. Look up the county’s current rate instead of the seller’s last bill. In many places a sale resets the assessed value, the figure the county taxes, so a new owner can pay more than the old one did.
- An insurance quote for this address. Premiums depend on the location, the age of the roof and the claims history, so a real quote beats any rule of thumb.
Then ask which one number would flip the answer. If $100 more a month in insurance turns the house negative, that’s the number to pin down before you make an offer.
For the full list of what to confirm, see 12 numbers to confirm before you make an offer on a rental.
So, does the 1% rule still work?
Use it to decide which listings deserve five minutes. Don’t use it to decide which one to buy.