1% Rule 

When evaluating an investment property, using rental metrics and analytics is crucial for making informed decisions. Metrics provide a clear picture of a property’s current or potential financial performance, helping investors gauge profitability and mitigate risks. The 1% rule is one metric that can help investors optimize their portfolios, ensuring they make the most out of their real estate ventures. 

What is the 1% Rule? 

If you’re new to real estate investing, you may be wondering, “What is the 1% rule?”  

The 1% rule is a real estate concept that states that a property’s monthly rental income should be at least 1% of the property’s purchase price. The 1% you charge your tenants should generate enough income to either meet or exceed the cost of your monthly mortgage payment. This tool is a great way to evaluate whether a property can generate positive cash flow and bring profit to your investment business. Following the 1 percent rule real estate guideline can aid you in making informed decisions about purchasing new rental units before you get to closing. 

1% Rule Formula 

The formula for the 1% rule in real estate is as follows: 

Minimum monthly rent = Property purchase price * .01  

As you can see, this formula is quick and easy to use. To calculate the minimum monthly rent that you’ll need to charge to break even on your mortgage payments, you’ll simply multiply the purchase price of the property by 1%. With a formula this simple, it’s easy to take the purchase prices of multiple properties and find the most profitable deal for your investment business. 

When to Use the 1% Rule 

The 1% rule should be used when you’re evaluating a potential purchase of rental property investments. It helps you to quickly analyze or estimate the minimum rent you’ll need to charge tenants to break even on your mortgage payments (or, if using the 2% rule, to make a profit). Paying your mortgage is a necessary burden when buying a new property for your rental business, but using a tenant’s rent to cover the cost can take some financial weight from your shoulders. 

How to Use the 1% Rule Calculator 

Adding a new property to your portfolio means many challenges and numbers to crunch. Innago’s 1% rule calculator is an easy way to find a property’s minimum rent instantaneously.  

Let’s discuss how the 1% rule real estate calculator works, including the necessary inputs as well as how to interpret its output. 

Inputs  

There are just two inputs needed to use the 1 rule real estate calculator: 

1. Property purchase price 
2. Percent rule (1%) 

The property purchase price is the listing price the seller sets for the potential rental property. You can either input the asking price or, if you think you’ll be able to negotiate with the seller, a lower price you think you’d be able to achieve. 

The percent rule is the 1% of the purchase price that you’ll charge tenants for monthly rent. This number helps you determine the minimum rent required to meet or exceed your mortgage. If you’re looking for even more profit, some landlords alternatively use the 2% rule, meaning they charge tenants 2% of the purchase price for rent instead of 1%. 

So, let’s put these inputs together. To calculate the minimum monthly rent on a property listed at $200,000, you’d simply multiply $200,000 (property purchase price) by 1% (percent rule). That’s it! 

Outputs 

The output of the 1% rule calculation is the minimum monthly rent. This number is the lowest amount you should charge for rent from your tenants for any one property because it meets the cost of your mortgage. If you decide to charge a higher amount for rent, such as 2% of the purchase price, you’ll exceed the cost of the mortgage and make a larger profit. 

Using the previous example, after multiplying $200,000 by 1%, you’ll have a minimum monthly rent of $2,000. 

How to Interpret the 1% Rule 

There are several considerations to keep in mind when using the 1% rule to ensure it strengthens your real estate investment decisions instead of harming them. It’s important to remember that the 1% rule doesn’t consider various costs such as insurance, property taxes, and any necessary upkeep of the property. There will be other monthly expenses than just your mortgage, and you’ll need to plan and budget for these costs, too. 

Additionally, the 1% rule doesn’t cover the specific market in your area — that responsibility falls on you to research. A minimum rent amount for a potential property may be $2,000 a month, but if the average price of rent in that neighborhood is $1,200, you may want to consider other options like lowering the rent or finding another property entirely. 

A “good” outcome of the 1% rule depends on you and your goals as a real estate investor. Always research and plan for the current market, potential monthly costs of running the property, and any other circumstances that may be important for your business. Additionally, be sure to pair the 1% rule with other real estate metrics like gross rent multiplier, monthly cash flow, and net operating income (especially those that consider operating expenses and your monthly mortgage payments). 

Conclusion 

The 1% rule is a useful real estate tool that allows you to quickly determine whether the monthly rent you’ll charge will meet or exceed the cost of your mortgage. This simple yet important equation helps you to make decisions about potential rental properties before you move further into the buying process.