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:

*Mortgage assumes 5% interest rate and a 30-year amortization
The above 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.