{"id":153271,"date":"2023-05-25T07:00:00","date_gmt":"2023-05-25T13:00:00","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=153271"},"modified":"2024-02-27T10:18:55","modified_gmt":"2024-02-27T17:18:55","slug":"1-percent-rule-in-real-estate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/1-percent-rule-in-real-estate","title":{"rendered":"1% Rule In Real Estate: What It Is And How It Works"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC7396769915\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p>The 1% rule is a real estate investment guideline indicating the minimum monthly rent you must charge to break even on a rental property. The rule states that your rent should be at least 1% of your property&#8217;s sale price.&nbsp;<\/p>\n\n\n\n<p>While the 1% rule can be a helpful metric for investment properties, it&#8217;s meant to be more of a filter than anything. You should take it with a grain of salt, especially when accounting for current home prices.<\/p>\n\n\n\n<p>This post will detail the 1% rule, what it doesn&#8217;t account for, and other metrics you should consider.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How the 1% Rule Works<\/h2>\n\n\n\n<p>The 1% rule helps you calculate how much rent you should charge a tenant. The rule accounts for the property&#8217;s purchase price plus the cost of necessary repairs. For example, if you purchase a home for $230,000, then spend $20,000 on repairs, you should charge your tenants $2,500 monthly if you follow the 1% rule. If your property is duplex, you&#8217;d instead charge $1,250 per tenant.&nbsp;<\/p>\n\n\n\n<p>The guideline can give you a basic idea of whether or not a property is worth investing in. If your mortgage payment is going to be greater than what you&#8217;re charging in rent, then, in theory, it&#8217;s probably not an ideal investment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What the 1% Rule Doesn&#8217;t Account For<\/h2>\n\n\n\n<p>If the 1% guideline was your only necessary calculation, you&#8217;d make your money back in 100 months or 8.33 years. However, real estate investing is far more complex than that. Here&#8217;s a list of just some<em>&nbsp;<\/em>of the things that aren&#8217;t factored into the 1% rule:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Mortgage interest rates<\/li>\n\n\n\n<li>Homeowner&#8217;s Association (HOA) fees<\/li>\n\n\n\n<li>Insurance premiums<\/li>\n\n\n\n<li>Property taxes<\/li>\n\n\n\n<li>Property management fees<\/li>\n\n\n\n<li>Ongoing property maintenance and repairs<\/li>\n\n\n\n<li>Atypical markets, such as San Francisco, New York, and other large cities<\/li>\n\n\n\n<li>Utilities<\/li>\n\n\n\n<li>Legal fees<\/li>\n\n\n\n<li>Additional income from rent, laundry, storage, etc.&nbsp;<\/li>\n\n\n\n<li>Marketing<\/li>\n\n\n\n<li>Vacancy periods<\/li>\n\n\n\n<li>Cash reserves<\/li>\n\n\n\n<li>Appreciation<\/li>\n\n\n\n<li>Depreciation<\/li>\n\n\n\n<li>The real estate market (in general)<\/li>\n\n\n\n<li>Rent increase per year<\/li>\n\n\n\n<li>Expense growth per year<\/li>\n<\/ul>\n\n\n\n<p><a href=\"https:\/\/www.biggerpockets.com\/blog\/1-percent-rule-dead\" target=\"_blank\" rel=\"noreferrer noopener\">Dave Meyer<\/a> pointed out that the 1% rule is an outdated suggestion created in a different market. While it was a great metric to use shortly after the financial crisis, it&#8217;s not as helpful today. If you&#8217;re basing your investment strategy solely on the 1% rule, you&#8217;ll miss out on many potentially great investments with rent-to-price ratios below 1%.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Alternatives To The 1% Rule<\/h2>\n\n\n\n<p>Many investors analyze dozens\u2014if not hundreds\u2014of deals before investing in any single one. In their initial research stage, investors try to quickly disqualify properties that don&#8217;t meet certain thresholds before getting into the nitty gritty.<\/p>\n\n\n\n<p>While you&#8217;ll never know exactly how much you&#8217;ll make on an investment, a few other calculations you can make will help you narrow your search when determining what you invest in.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Cash flow<\/h3>\n\n\n\n<p>Focusing on an immediate return may make your monthly cash flow a better metric.&nbsp;<\/p>\n\n\n\n<p><a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/rental-property-cash-flow-analysis\" rel=\"noreferrer noopener\">Cash flow<\/a>&nbsp;calculates your gross monthly cash flow minus your total operating expenses. Typically, &#8220;good&#8221; cash flow is when you net $100-$200 per unit monthly. However, that all depends on how much your initial investment is. If you&#8217;re making $200 monthly on a $100,000 investment, that&#8217;s not an attractive return. However, if you&#8217;re making $200 monthly on a $10,000 investment, that&#8217;s a 2% monthly return.&nbsp;<\/p>\n\n\n\n<p>Here&#8217;s how to calculate cash flow:<\/p>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:100%\">\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:100%\">\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n<figure class=\"wp-block-table is-style-regular\"><table><tbody><tr><td class=\"has-text-align-left\" data-align=\"left\"><strong>Gross monthly cash flow<\/strong><br \/>(including rent and additional income, such as parking, pet fees, etc.)<\/td><td><strong>$2,000<\/strong><\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\"><strong>Operating expenses<\/strong><\/td><td><\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Monthly mortgage payment (principal and interest)<\/td><td>$950<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Property taxes<\/td><td>$150<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Homeowner\u2019s insurance<\/td><td>$50<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Property management fees (10% of rental income)<\/td><td>$200<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Repair reserves budget (10% of rental income<\/td><td>$200<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Vacancy reserves budget (5% of rental income)<\/td><td>$100<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Additional expenses (e.g., other insurance, gas\/mileage, supplies, etc.)<\/td><td>$100<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\"><strong>Net monthly cash flow<\/strong> <strong>(or net operating income\u2014NOI for short)<\/strong><\/td><td><strong>$250<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n<\/div><\/div>\n<\/div>\n<\/div>\n<\/div><\/div>\n<\/div>\n<\/div>\n\n\n\n<p>Based on these calculations, you will make $250 each month or $3,000 per year, not including any tax benefits. Cash flow can tell you how much you make monthly, but this knowledge only gets you so far.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Cash-on-cash return<\/h3>\n\n\n\n<p>Most investors prefer to calculate cash-on-cash returns.<\/p>\n\n\n\n<p>Your cash-on-cash return is how much money you profited in annual pre-tax cash flow divided by how much you initially invested. Cash-on-cash return calculates the percentage of the investment you made back this year in cash flow. It&#8217;ll help you determine if that $250 per month you&#8217;re making in profit is worth it. Most investors prefer this method of calculating their operating income.&nbsp;<\/p>\n\n\n\n<p>Let&#8217;s say you purchased a property for $200,000. You put 20% down ($40,000), paid 2% in closing costs ($4,000), and made another $6,000 in repairs. Altogether, you spent $50,000. If your new annual cash flow is $3,000, then $3,000 \/ $50,000 = your cash-on-cash return of 6%.<\/p>\n\n\n\n<p>If this property was a duplex and you made $500 monthly instead, your cash-on-cash return would be 12% ($6,000 \/ $50,000). You&#8217;ll want to aim for a cash-on-cash return between 10-12%, preferably closer to 12%, to outpace the&nbsp;<a target=\"_blank\" href=\"https:\/\/www.sofi.com\/learn\/content\/average-stock-market-return\/#:~:text=Average%20Market%20Return%20for%20the%20Last%2030%20Years&amp;text=Looking%20at%20the%20S%26P%20500%20for%20the%20years%201992%20to,%25%20when%20adjusted%20for%20inflation).\" rel=\"noreferrer noopener\">S&amp;P 500<\/a>&nbsp;and other popular stock market funds.&nbsp;<\/p>\n\n\n\n<p>Keep in mind this is your annual pre-tax cash flow. It doesn&#8217;t account for your tax burden or depreciation. Your cash-on-cash return never accounts for the following:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Equity<\/li>\n\n\n\n<li>Opportunity costs&nbsp;<\/li>\n\n\n\n<li>Appreciation<\/li>\n\n\n\n<li>Risks associated with your investment<\/li>\n\n\n\n<li>The entire holding period<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Internal rate of return (IRR)<\/h3>\n\n\n\n<p>IRR determines the potential profitability of your property investment by estimating the entire holding period, compared to cash-on-cash return, which only focuses on the profitability of your initial investment.&nbsp;<\/p>\n\n\n\n<p>If you&#8217;re planning on holding onto your investment for a few years, calculating your IRR is probably your best bet (even though many investors prefer the simplicity of solving for cash-on-cash return). Here&#8217;s a full breakdown of how to&nbsp;<a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/internal-rate-return-irr\" rel=\"noreferrer noopener\">calculate your IRR<\/a>.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Should You Use the 1% Rule?<\/h2>\n\n\n\n<p>The 1% rule was never an actual &#8220;rule.&#8221; It was a helpful guideline once upon a time, but you can make several more accurate calculations when narrowing the scope of which properties are worth investing in. You&#8217;ll likely miss many great investment opportunities if you live and die by the 1% rule. Calculate your cash-on-cash return or IRR instead.&nbsp;<\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_26b6afef7b7badb5980198cc8192019d\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_7c4c89c076f4c95772c77b5ad05dee7c\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_ee33c461cbc32bf838ab26622cc07a40 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/agent\/match\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Agent Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/1-percent-rule-in-real-estate&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/1-percent-rule-in-real-estate&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Real estate professionals use the 1% rule to determine whether a property is a good investment. <\/p>\n","protected":false},"author":613625,"featured_media":153275,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524,7119],"tags":[],"class_list":["post-153271","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/153271","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613625"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=153271"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/153271\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/153275"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=153271"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=153271"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=153271"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}