1 Percent Rule

What it is

The 1 percent rule is a 30-second filter for whether a rental property has a shot at cash flowing. Take the monthly rent, divide it by the all-in purchase price, see if the ratio clears 1%. A $200,000 house needs to rent for $2,000 a month. Simple.

This is a screening tool, not an underwriting tool. It lives at the same level as the 70 percent rule on the flip side — they get you in the ballpark, they’re not the end all be all. You always start at making decisions quickly and then you move down the pipeline and refine things further.

Why it matters

Here’s where the 1% rule comes from. On every rental, before the mortgage shows up, you’re bleeding about 40% of gross rent to overhead. Ross calls it the 60% rule: you keep 60% of rent after all the line items — vacancy, maintenance, capex, property management, taxes, insurance. On a $200,000 property renting for $2,000, that 60% gives you $1,200 a month to cover principal and interest. That’s about what a $200K 30-year mortgage runs. So the math works out to basically flat on cash flow, which is what you’re shooting for.

On a $200,000 house renting for $1,700 — which is what Ross originally thought was fine — you’re actually collecting closer to $1,020 after the 60% bite, and then paying $1,200 in mortgage. That’s $180 a month negative. “I figured out I was actually losing around $200, maybe $300 a month. That is no good.”

The other mistake: thinking “it cash-flows” because rent minus mortgage is positive. That’s the gross-minus-mortgage trap. After you figure in vacancy, maintenance, capex, and property management, the fantasy disappears.

How it shows up

If a property passes the 1%, you still have to run the real model — actual rent, actual taxes and insurance, actual interest rate. The 1% rule came around when interest rates were lower, so at today’s rates you might need to push toward 1.1% or 1.2% just to break even conservatively. The calculation hasn’t changed; the market conditions have.

Coastal markets price at 0.4-0.6%. Middle-America working-class neighborhoods hit 0.8-1.2% when you’re buying right. A flipper who only looks at flashy markets concludes the 1% rule is “outdated.” They’re looking at the wrong houses.

The rule also pairs with the 70 percent rule on the flip side. Buy a house at 70% of ARV, do the BRRRR, refinance at 70-80% LTV. Now you’re all in at around $210K on a $300K ARV house. If it rents for $2,100, you’re clearing 1%. That’s the play. You buy the deal right so the rental numbers work — the rental doesn’t happen first and then the buy price gets backed into.

Related

31 percent rule, cash flow, 70 percent rule, barely bankable, brrrr