The 1 percent rule for rental property, explained

How the rule works

Divide the expected monthly rent by the purchase price. If the answer is 1 percent or more, the property passes the screen. Some investors use 2 percent as a stricter version.

The table is plain arithmetic. It does not say whether a given home would rent for that amount where you live.

What it is good for

It sorts a long list quickly. If you are scanning 40 listings, the rule drops the ones where rent is far below price before you spend any time on them. It also forces you to look up rents, which is the most useful number in the whole analysis.

It is less useful in high priced markets, where few homes pass and many good rentals still work, and in low priced markets, where homes pass but need heavy repairs or sit empty.

What it leaves out

• Property tax, which differs by county and can be several times higher in one place than another.
• Insurance, which for a rental follows landlord policy pricing.
• Repairs and capital items such as a roof or a water heater.
• Vacancy, the weeks a unit sits empty between tenants.
• Your loan payment and cash left after it.
• Taxes: depreciation, reported on Form 4562, and the way rental income is reported on Schedule E.

Example a made-up $200,000 house rents for $2,000 a month, so it passes the rule at 1 percent. Yearly rent is $24,000. Property tax of $4,800, insurance of $1,800, repairs and reserves of $4,000 and one month of vacancy at $2,000 total $12,600. That leaves $11,400 before the loan payment. A $2,000 a month loan payment costs $24,000 a year, so the house would lose $12,600 a year in cash on that loan.

The same house can pass the rule and still lose money, because the rule only compares rent to price. Use the pro forma guide to build the whole picture.

What to use after the screen

• Net operating income: rent after vacancy, minus operating costs, before the loan.
• Cap rate: net operating income divided by the purchase price.
• Cash on cash: yearly cash left after the loan, divided by the cash you put in.
• A stress test: the same numbers with lower rent and higher repairs.

The rule is a doorway, not a decision. After a listing passes the screen, replace the single rent number with a full yearly estimate, and compare properties on the same measures. Whichever measure you pick, use it the same way each time so the comparison means something, and write down where each number came from. Remember what the rule does not know: your market may price homes far from the rent they earn. In a place where homes cost many times their yearly rent, nothing passes, and the useful question becomes which costs you can control. In a place where many homes pass, the useful question is why, because low prices often mean high repair needs, high property tax or weak demand. Check the rent comparables, the age of the roof and systems, and the tax bill before you trust a pass.

Where your own numbers come from

Once you own a rental, your own books replace the rule. DoorKeeping tracks each property's rent and expenses, so you can ask Claude or ChatGPT, for example, "What was the net income of each property last year?" and see the real percentage for your homes. See the guide on cap rate from your own books.

Tenants pay rent to your own bank account by bank transfer, free from DoorKeeping, and DoorKeeping marks rent paid when the deposit matches.

Sources

1. Topic no. 414, Rental income and expenses, IRS, read Oct 30, 2026

Questions

What is the 1 percent rule?

A screening rule of thumb that monthly rent should be at least 1 percent of the purchase price.

Is a property that passes the 1 percent rule profitable?

Not necessarily. The rule ignores taxes, insurance, repairs, vacancy and your loan payment.

Is the 2 percent rule better?

It is stricter, so fewer homes pass. It has the same limits as the 1 percent rule.