One Percent Rule

DEFINITION of 'One Percent Rule'

A rule of thumb used to determine if the monthly rent earned from a piece of investment property will exceed that property's monthly mortgage payment. The aim of the one percent rule is to have the rent be greater or equal to the mortgage payment, so the investor breaks even on the property at worst. The rule is used for quick estimation, as there are other costs associated with a piece of property that are not taken into account, such as upkeep, insurance and taxes.

BREAKING DOWN 'One Percent Rule'

Purchasing a piece of property for investment requires a thorough analysis of future rents compared to the cost of owning that property. Property owners want to maintain a cash flow greater than costs. For example, an investor is looking to purchase a home valued at $200,000, with the goal of renting the home out for income. After placing 20% down, the investor has a mortgage of $160,000. The one percent rule says that the home would have to be rented out for no less than $1,600 per month ($160,000 * .01).

RELATED TERMS
  1. Rent Expense

    The cost incurred by a business to utilize property. Business ...
  2. Rent Control

    A price control that limits the amount a property owner can charge ...
  3. Property Manager

    An individual or company responsible for the day-to-day functioning ...
  4. Property Management

    The administration of residential, commercial and/or industrial ...
  5. Owners' Equivalent Rent - OER

    The amount of rent that could be paid to substitute a currently ...
  6. Income Property Mortgage

    A loan given to an investor to purchase a residential or commercial ...
Related Articles
  1. Personal Finance

    The Complete Guide To Real Estate Renting

    Everything you need to know about renting property.
  2. Managing Wealth

    8 Must-Have Numbers For Evaluating A Real Estate Investment

    These calculations can help you figure out if a particular property will be a valuable investment.
  3. Personal Finance

    Tax Breaks For Second-Home Owners

    The tax rules on a second home vary, depending on how the property is used.
  4. Personal Finance

    Getting U.S. Tax Deductions On Foreign Real Estate

    If your home or second home is not in the United States, you can still get U.S. tax deductions. How many and what kind depends on whether you also rent it.
  5. Investing

    Can't Sell Your Home? Rent It

    Find out how to profit from your property when the housing market dips.
  6. Personal Finance

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
  7. Personal Finance

    Tax Rules For Renting Out Your Vacation Home

    Here's a rundown of the specific tax rules that apply to homeowners renting out a vacation property.
  8. Personal Finance

    4 Reasons Why Renting a Home is a Wise Decision

    We've all heard that a home is a great investment, but is it really? In this article, we will look at four reasons why renting could be wiser than homeownership.
  9. Personal Finance

    The Complete Guide To Becoming A Landlord: Hiring A Property Manager

    A property manager can perform such duties as marketing your rental property, selecting tenants, maintaining the property, creating budgets and collecting rent. You may consider hiring a property ...
  10. Personal Finance

    Is Homeownership A Smart Investment Again?

    Homeownership remains cheaper than renting across the nation. However, these findings speak broadly to the national market, and there are several situations where it still makes more sense to ...
RELATED FAQS
  1. What is the importance of the capitalization rate in real estate investing?

    Find out why an investment property's capitalization rate is important to real estate investors and how it can be used to ... Read Answer >>
  2. Do I have to pay capital gains tax on commercial property?

    I am retired and living on a fixed income. When selling a piece of commercial property, do I have to report and pay capital ... Read Answer >>
  3. Should I rent an apartment or buy a condo?

    I am wondering if it's a good idea to buy a condo if I already have a mortgage on a house and student loans. My debt totals ... Read Answer >>
  4. What criteria does a property need to meet to be considered an 'investment grade' ...

    Learn what it takes for institutional investors to consider a property "investment grade," such as real estate investment ... Read Answer >>
  5. How is Net Operating Income (NOI) used in real estate?

    Find out more about net operating income, what it measures and how it is used to analyze a real estate property's return. Read Answer >>
  6. How many years after the sale of a home must pass before you are considered to be ...

Trading Center