Rules of thumb exist to filter deals fast, not to buy them. The 1% Rule and the 50% Rule are the two most quoted heuristics in small multifamily investing — and the two most misused. Here is what they actually measure, and when to ignore them.
The 1% Rule: A Price-to-Rent Screen
The rule: monthly rent should be at least 1% of the purchase price.
- $200,000 property → needs $2,000/month total rent
- A duplex renting $1,100 + $1,000 = $2,100 on a $210,000 purchase passes
What the 1% Rule Is Good For
- Speed: sorting 40 listings into "maybe" and "no" in ten minutes
- Market selection: it is really a rent-to-price ratio test. Midwest and Southeast markets often hit 1%+; coastal California rarely exceeds 0.4%
- Screening for cash flow potential rather than appreciation-only plays
Where the 1% Rule Fails
- It ignores expenses entirely. A 1% property with $30,000 of deferred roof/foundation work is a worse deal than a 0.8% property in move-in condition.
- It punishes good markets. A 0.6% duplex in a city with 5% annual appreciation and strong rent growth can outperform a 1.1% property in a declining town.
- Master-metered buildings with owner-paid utilities can "pass" at 1% and still lose money monthly.
- Class C/C- neighborhoods hit 1.2-1.5% precisely because of eviction risk, turnover, and CapEx — the rule can lead beginners straight into the worst buildings.
The 50% Rule: An Expense Assumption
The rule: operating expenses (everything except the mortgage) will consume roughly 50% of gross income.
- Gross scheduled income: $38,400 → assume ~$19,200 of OpEx
- NOI ≈ $19,200 before debt service
What the 50% Rule Is Good For
- Back-of-envelope NOI when a seller's pro forma is obviously fantasy
- Sanity-checking underwritten expenses: if a listing claims $8,000 of expenses on $38,000 of income (21%), be suspicious — someone is deferring maintenance
- Quick DSCR estimates before pulling real tax and insurance quotes
Where the 50% Rule Fails
| Situation | Actual expense load |
|---|---|
| Tenants pay own utilities, low taxes | 30-38% |
| Owner pays heat/water, high taxes, older roof | 55-65% |
| New construction duplex | 25-35% |
| Century-old fourplex, master metered | 60%+ |
The 50% rule is an average across a huge distribution. Using it on a specific building is like planning a wardrobe around the national average temperature.
Using Both Rules Together (The Right Way)
- Screen with 1%: does the price-to-rent ratio even justify a look?
- Stress-test with 50%: at 50% expenses, does the property still cover debt service with margin?
- Underwrite with real numbers: actual taxes (call the county), insurance quotes, utility costs from the seller's T-12, and a real CapEx reserve. Our guide to reading rent rolls and T-12s covers exactly what to request.
Worked Example: Where the Rules Disagree
A $300,000 fourplex grosses $3,000/month (exactly 1% — passes).
- 50% rule NOI: $18,000/year
- Real numbers: taxes $7,200, insurance $2,600, owner-paid water/trash $3,600, maintenance $2,400, reserves $2,400 = $18,200 OpEx → NOI $17,800
Here the rules align. But the same building with separate meters and a $2,000 tax abatement runs 38% expenses → NOI $22,300 — a 24% difference in NOI, which swings both cap rate and your maximum offer. The rules got you to the table; only real numbers get you to the closing table with the right price.
Next Step
Once a deal passes the 1% and 50% screens, run it through the Multifamily Cash Flow & NOI Calculator with real expense inputs to get true NOI, cap rate, and cash-on-cash return before you write an offer.