What Is The 1% Rule In Real Estate?

[Cole Simpson]

In real estate investing, the 1% rule compares the price of an investment property to the gross revenue it will earn. The 1% rule states that a potential investment's monthly rent must be equal to or less than 1% of the purchase price.

Consider the following scenario for a home worth $200,000:

$200,000 x 0.01 = $2,000

Using the 1% guideline, you should look for a mortgage with a monthly payment of $2,000 or less and charge your tenants a $2,000 minimum monthly rent.

Let's say the house needed roughly $10,000 in repairs. In this case, you would add the cost of repairs to the home's purchase price, bringing the total to $210,000. Then you'd multiply the total by 1% to achieve a $2,100 minimum monthly payment.

If you're looking to buy an investment property, the 1% rule can help you identify the ideal property to meet your financial objectives. You can use it to rapidly determine how the property will cash flow, or you can use it to help set monthly rent if the property is currently unoccupied.

It's vital to keep in mind that this is merely a guideline. It's a fine place to start, but when choosing how much rent to charge your tenants, other considerations must be considered.

What other considerations can you add?