The 1% rule is a guideline real estate investors use to choose viable investment options for their portfolios. Although the rule has helped many investors make wise decisions regarding their investment properties, the current real estate market may make following the 1% rule unrealistic.
Explore the 1% rule of real estate and why it may not be feasible to follow the standard guideline in the current real estate market.
What Is the 1% Rule?
The 1% rule is an unofficial benchmark that real estate investors use to narrow profitable investment opportunities. The 1% rule says that investors should only buy properties for which they receive a gross monthly rent payment equal to or greater than 1% of the property’s purchase price.
Investors must calculate a rent-to-price ratio to determine if their investment property meets the 1% rule. To find this ratio, multiply the property’s purchase price by 1%. This number represents the minimum amount you should charge in rent to make a profit. For example, if you have a property to purchase for $180,000, you’ll want to assess a minimum of $1,800 per month.
This number doesn’t include operating expenses or repairs, but it gives you a base amount to consider. You can add these expenses to the total purchase price for the 1% rule test to gain a more accurate representation of what you should charge for rent.
Traditional Benefits of the 1% Rule
The most significant benefit of the 1% rule is that it allows investors to prescreen properties. It is an easy tool that eliminates undesirable properties from your list of possible investments. We believe the rule makes it an excellent screening method under typical market circ*mstances.
Limitations of the 1% Rule
Although the 1% rule is helpful in many situations, investors may not trust it in specific situations. These include purchasing real estate in cities where rent is typically less than 1% of the average home purchase price.
For example, if the median list price in a metro area is over $1 million, the 1% rule would necessitate rents of close to $10,000 per month. In this case, investors would forgo the 1% rule for a more realistic assessment of what makes a viable investment.
Is the 1% Rule Realistic in the Current Market?
The 1% rule may not be realistic for investors buying rental property in the current market. According to a recent Forbes article, median housing prices have risen to $450,000 in many areas, nearly 17% higher than the highest recorded average. A monthly rent of $1,326 is the average, with an average asking price of $1,900.
The 1% would have the average renter paying $4,500 per month, much higher than most renters can afford. With the wild fluctuations in the housing market and a downward swing projected on the horizon, you should work with a local real estate agent and financial advisor. This will enable you to potentially determine the right investment property and rent for your area.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Programs that depend on tenants for their revenue may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants. All examples are hypothetical and for illustrative purposes only.
FAQs
Using the 1 percent rule, you'd need to charge more than $13,800 per month in rent just to break even, which is simply unrealistic for most rental properties.
How realistic is the 1% rule in real estate? ›
The 1% rule isn't foolproof, but it can be a good tool to help you whether a rental property is a good investment. As a general rule of thumb, it should be used as an initial prescreening tool to help you narrow down your list of options.
Is the 1% rule outdated? ›
The 1% rent-to-price (RTP) ratio rule, once a go-to method for estimating rental property cash flow, may no longer hold its ground in today's real estate landscape. Recent evidence suggests that this rule is losing its effectiveness due to inflated home prices and shifts in the rental market.
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 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 golden rule of real estate investing? ›
The golden rule
“Buy a property with 20% down. [That] has always been my formula because they used to do with 10%, but it's not possible anymore. I repeated that formula again and again and again, and then making sure the tenant has paid my mortgage. It's pretty easy that way.”
What is the 1% rule of thumb in real estate? ›
The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.
What is the new 1% rule? ›
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.
What is the 50% rule in real estate? ›
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
What is the 3% rule in real estate? ›
1%, 2% or 3% rule is a gage of measuring if the investment would be profitable. The comparison is between the gross rent and the purchase price. 50% rule relates to quick reference practice of estimating your operating expenses so you can arrive at your NOI (net operating income). 1. Realty Circle.
Generally, a good ROI for rental property is considered to be around 8 to 12% or higher. However, many investors aim for even higher returns. It's important to remember that ROI isn't the only factor to consider while evaluating the profitability of a rental property investment.
What is the 80% rule in real estate? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
How to tell if a property is a good investment? ›
Simply divide the median house price by the median annual rent to generate a ratio. As a general rule of thumb, consumers should consider buying when the ratio is under 15 and rent when it is above 20. Markets with a high price/rent ratio usually do not offer as good an investment opportunity.
What is the number one rule in real estate? ›
1 Rule real estate FAQs
It states that the monthly rent of a rental property should be at least 1% of the property's purchase price. While this can be achievable in certain areas, high-cost markets like San Francisco may not align with this rule due to high property values and lower rent prices.
What is the 90 10 rule in real estate? ›
He explained how investors can leverage strengths in one area to complement others, fostering balanced and effective partnerships. Roger shared his 10/90 rule, balancing risk by investing 10% in higher-risk projects and 90% in stable, cash-flowing properties.
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.
Why is there a 70% rule in real estate? ›
The 70% rule helps home flippers determine the maximum price they should pay for an investment property. Basically, they should spend no more than 70% of the home's after-repair value minus the costs of renovating the property.
What is the 5 2 rule in real estate? ›
During the 5 years before you sell your home, you must have at least: 2 years of ownership and. 2 years of use as a primary residence.
