The 1% rental investment rule is a general guideline used by real estate investors to quickly evaluate the potential profitability of a rental property. It is a simple rule of thumb that helps investors determine whether a property’s rental income has the potential to cover its monthly expenses and generate positive cash flow.
According to the 1% rule, a rental property’s monthly gross rental income should be at least 1% of its total acquisition cost or purchase price. In other words, if you are considering buying a property for $200,000, the monthly rental income should be at least $2,000 (1% of $200,000) to meet the 1% rule.
Keep in mind that the 1% rule is a rough estimation and not a comprehensive financial analysis. It is a quick initial screening tool used during the property search phase to identify properties that may have the potential to be financially viable as rental investments. However, it does not take into account other important factors like operating expenses, property taxes, financing costs, maintenance, or vacancies.
While the 1% rule can be a useful starting point, investors should conduct a more thorough financial analysis and consider other factors to make informed decisions. Every real estate market is different, and the actual profitability of an investment property depends on a variety of factors, including local market conditions, property location, potential for rental appreciation, and individual investment goals.
Ultimately, the 1% rule can be a helpful tool for quickly narrowing down potential rental properties, but it should not be the sole determinant of your investment decision. A comprehensive financial analysis and due diligence are essential to make sound real estate investment choices.