# 1% Rule in Real Estate: Maximizing Your Rental Investment Profit

## What Is the 1% Rule?

The 1% rule is a critical benchmark for real estate investors. It ensures that the rental income from an [investment property](https://www.investopedia.com/terms/i/investment-property.asp) at least covers its monthly [mortgage payment](https://www.investopedia.com/terms/m/mortgage.asp), aiming to break even or turn a profit. Learn how to calculate this rule and effectively apply it to your real estate ventures.

### Key Takeaways:

*   The 1% rule helps investors determine if monthly rent will cover or exceed the property’s mortgage payment, ensuring at least a break-even point.
*   To apply the 1% rule, multiply the property's purchase price plus repairs by 1% to establish a baseline for monthly rent.
*   This rule serves as a quick estimation tool and does not account for additional factors like maintenance, insurance, and taxes.
*   Comparing the 1% rule with tools like the gross rent multiplier can provide further insights into investment viability and payoff timelines.  
    

The one percent rule can provide a baseline for establishing the level of rent that commercial property owners charge on real estate space. This rent level can apply to all types of tenants in both residential and commercial real estate properties.

Purchasing a piece of property for investment requires a thorough analysis of numerous factors. The one percent rule is just one measurement tool that can help an investor gauge the risk and potential gain that might be achieved by investing in a property.

## Understanding the Mechanics of the 1% Rule

Multiply the property's purchase price and repairs by 1% for a rent estimate. The result is a base level of monthly rent. Compare it to the mortgage payment to understand the property's monthly cash flow.

> **Important**
>
> This rule is only used for quick estimation because it doesn't take into account other costs associated with a piece of property, such as upkeep, insurance, and taxes.

## Applying the 1% Rule: A Practical Example

An investor is looking to obtain a [mortgage loan](https://www.investopedia.com/terms/m/mortgage.asp) on a rental property with a total payoff value of $200,000. Using the one percent rule, the owner would calculate a $2,000 monthly rent payment: $200,000 multiplied by 1%. In this case, the investor would seek a mortgage loan with monthly payments of less than and absolutely no more than $2,000.

## Comparing the 1% Rule With Other Investment Calculations

The one percent rule also helps give an investor a base point from which to consider other factors regarding the ownership of a property. A second important calculation is the **gross rent multiplier**, which uses the monthly rent level to determine the amount of time it will take to pay off the investment. This calculation is achieved by dividing the total borrowed value by the monthly rent.

In the example of the home with a value of $200,000, the investor would divide $200,000 by $2,000. This gives the investor a 100-month payoff period, which translates to a little over 8.3 years. Investors can also use the [gross rent multiplier](https://www.investopedia.com/terms/g/gross-income-multiplier.asp) when considering the payment schedule terms of a loan taken for the property.

The **70% rule** implies that an investor [should not pay more than 70%](https://www.calculator.net/rental-property-calculator.html) of the property's estimated value after repairs fewer costs.

## Important Factors to Consider When Using the 1% Rule

In calculating the gross rent multiplier, a buyer must also consider the rental rates in the area in which the property is located. If local rents are below $2,000, the investor may need to lower the rent to attract tenants.

[Maintenance](https://www.investopedia.com/terms/m/maintenance-expenses.asp) is another key factor to consider. The property owner is responsible for upkeep and repairs. While a deposit might cover substantial damages, it's also important for the owner to budget a specified amount of the rent for savings toward maintenance. This can contribute to profits if it's unused, and the money would be available when any maintenance needs arise.

Overall, investing in real estate can be lucrative for long-term investors. The base rent that an owner charges on any type of property sets the level of payments expected by tenants. Owners typically raise rent annually to manage inflation and other costs associated with the property, but the base rate is an important level that determines the overall return on an investment.

## The Bottom Line

The 1% rule offers a straightforward guideline for investors to assess potential rental property investments. By ensuring the property's monthly rent is at least 1% of the purchase price plus repairs, investors safeguard against losses.

While other costs like upkeep, taxes, and insurance are not considered by this rule, it serves as an initial benchmark. Investors should also use tools like the gross rent multiplier and the 70% rule to evaluate different aspects of the investment's viability. Ultimately, understanding and applying these rules helps in making informed decisions about real estate investments.