Frequently Asked Questions
What is the 1% rule?
The 1% rule states that a rental property's monthly rent should equal at least 1% of the total purchase price (plus any rehab cost). It is a quick screening filter to identify properties likely to generate positive cash flow at typical financing terms.
Does passing the 1% rule guarantee profit?
No. A property can pass the 1% rule and still lose money once a high property tax bill, HOA fees, chronic vacancy, or management costs are included. Use the rule only as a first-pass filter, then run a full analysis.
Why is the 2% rule so hard to find in most markets?
In high-appreciation markets, purchase prices have risen faster than rents, compressing yield ratios. The 2% rule is primarily achievable in low-cost secondary and tertiary markets where prices are modest relative to rent levels.
How is the GRM different from the 1% rule?
Both use gross rent and price. The 1% rule expresses rent as a percentage of price and applies a threshold; the GRM expresses price as a multiple of annual rent. They are mathematically linked: a 1% monthly ratio equals a GRM of about 8.3, and a 2% ratio equals a GRM of about 4.2.
Should I add closing costs to the all-in basis?
Yes, for a true all-in picture. Typical closing costs run 2-5% of the purchase price. Including them lowers the rent-to-price ratio and gives a more conservative - and more accurate - screen result.
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