Why 1% of monthly gross rents Rule purchase price?

[Brian Bonetta]

Why does it make sense to purchase a to purchase a property at 1% of gross months rents? Can someone help me understand this rule, and why it makes sense?

Thanks! 👍🏼

[Kenneth Garrett]

@Brian Bonetta

In theory if you have rent at $1000 your purchase should be no more than 100,000.  When you add expenses and P&I in general it will cash flow.  See example below.  The flaw with the theory is doesn’t work in all cases.  Remember it’s just a guide.

100,000 purchase  
20% down 20K            
Mortgage 80K         
P&I $429    
Property taxes $200
Insurance $50                   
Vacancy (5%) $50.        
Capex (5%) 50

Cash Flow $221