The "1% Rule" as Applied to Rental Property Investing

There is a very handy metric for quickly being able to determine whether or not an investment into a rental property is going to yield positive cash flow. it is commonly known among real estate investors as the “1% Rule”. Simply put it is the monthly rental income divided by the purchase price or After Repair Value ARV (as defined in our previous post). For example, if a property costs $100,000, or the ARV is $100,000, and it rents out for $1,000 a month, it will most likely have positive cash flow even if leveraged up to 75%. We can see more detail in the breakdown below:

This scenario is relatively conservative because it assumes, vacancy, maintenance, and capital expenditures. However, those costs may be minimal if the property is newly rehabbed.

The higher above the 1% Rule, the better, but it is a good quick metric to use when analyzing whether or not a deal might make sense. Every deal is different, and there are many factors to consider. But the starting point should always be positive cash flow. If a property does not cash flow from Day 1, then you’re going to need a lot more luck on your side rather than solid deal fundamentals.