1% rule

Business / By / September 5, 2023

The 1% Rule guides real estate investors to ensure a property’s monthly rent is at least 1% of its purchase price, facilitating positive cash flow and investment returns. This approach considers property value and rental income, helping make informed investment decisions while acknowledging market variations and property types.

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Characteristics of the Rule:

  • Monthly Rent to Purchase Price Ratio: The central characteristic of the 1% Rule is the ratio between the monthly rent and the purchase price of the property.
  • Quick Viability Assessment: It provides a quick initial assessment of whether a rental property has the potential to generate positive cash flow.

Benefits of Applying the 1% Rule:

  • Cash Flow Assurance: Ensuring that the monthly rent is at least 1% of the purchase price helps secure positive cash flow from the property.
  • Risk Mitigation: The rule aids in avoiding investments in properties that may not generate sufficient income to cover expenses.
  • Desirable Returns: By adhering to the rule, investors aim for rental properties that offer favorable returns on their investment over time.

Challenges and Considerations:

  • Market Variability: The 1% Rule may not be universally applicable due to variations in real estate markets. In high-demand markets, achieving 1% rent-to-price ratio could be challenging.
  • Property Types: Different property types may not align with the 1% Rule, as their purchase prices and potential rental income can differ significantly.

Examples of Application:

  • Basic Application: For a property purchased at $200,000, the monthly rent should ideally be at least $2,000 (1% of the purchase price).
  • Rule Variations: Investors may adapt the rule to their risk tolerance and market conditions, using different percentage thresholds such as 0.8% or 1.2%.

Key Highlights:

  • Guiding Metric: The 1% Rule suggests that rental properties should generate monthly rent equal to or exceeding 1% of their purchase price.
  • Investment Viability: The rule helps quickly assess whether a property can generate positive cash flow and be a potentially profitable investment.
  • Positive Cash Flow: Adhering to the rule ensures that rental income covers expenses and generates positive cash flow for investors.
  • Risk Management: By following the rule, investors mitigate the risk of investing in properties with low potential for profitability.
  • Desirable Returns: The 1% Rule aims to deliver attractive returns on investment by ensuring rent aligns with property value.
  • Market Sensitivity: The rule considers market variability, adapting to different real estate markets and economic conditions.
  • Property Types: It acknowledges that different property types may have varying rent-to-price ratios, allowing flexibility.
  • Customization: Investors can adjust the rule’s threshold (e.g., 0.8% or 1.2%) to suit their risk tolerance and market conditions.
  • Initial Screening: The rule serves as an initial screening tool, aiding investors in making informed property investment decisions.
  • Consideration of Costs: It highlights the importance of evaluating expenses to ensure sustainable cash flow in the long term.

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About The Author

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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