1% Rule for Investors (Real Estate Glossary Definition)

The 1% Rule is a guideline often used by real estate investors to quickly evaluate the potential profitability of a rental property. According to this rule, a property is generally considered a good investment if the monthly rental income is at least 1% of the property's purchase price.

Example:

• Purchase Price: $200,000
• Required Monthly Rent (1%): $2,000

If a property worth $200,000 can be rented out for $2,000 or more per month, it meets the 1% rule, suggesting it could generate sufficient income to cover operating expenses, mortgage payments, and potentially provide a positive cash flow.

Why It Matters: The 1% rule helps investors screen potential properties by providing a quick metric to determine whether the rental income will likely cover the associated costs. While it is a useful initial filter, it's important to conduct more detailed financial analysis to consider factors such as vacancy rates, property taxes, insurance, and maintenance costs before making a final investment decision. 

Limitations: Market Variability: In high-cost markets, it may be difficult to find properties that meet the 1% rule.

Not Absolute: The rule is a general guideline and doesn’t account for all variables, so it should be used alongside other metrics, like the cash flow analysis and cap rate, to assess an investment’s viability. This rule is widely recognized in the real estate investment community and serves as a quick tool for gauging the potential return on a rental property.