Real estate investing has two "rules of thumb" that have survived 30+ years: the 1% rule and the 50% rule. Both are screening tools designed to quickly separate mediocre deals from good ones. Neither is a substitute for actual analysis, but both save you time.
The 1% Rule
Monthly rent should be at least 1% of the purchase price.
$300,000 purchase price → $3,000/month rent minimum.
How It Works
If a fourplex rents for $4,300/month and is priced at $350,000, it passes the 1% rule ($4,300 ÷ $350,000 = 1.23%). If the same building is priced at $500,000, it fails ($4,300 ÷ $500,000 = 0.86%).
Why It Matters
The 1% rule is a proxy for cap rate. In most US markets, properties that pass the 1% rule will have cap rates above 5-6% (depending on local expenses). Properties below 1% usually have caps below 4%, which makes them speculative bets on appreciation rather than cash flow.
When to Ignore It
- High-appreciation markets (SF, NYC, Seattle): prices have already run; expect 0.5-0.7% rule properties
- Very new construction: cap rates are compressed upfront but lock in long-term
- House-hacking scenarios: you're living in one unit, reducing your effective cost
How to Use It
When you see a listing, divide monthly rent by asking price in your head. Takes 10 seconds. Below 0.8%? Keep scrolling. Above 1.2%? Worth a deeper look.
The 50% Rule
Operating expenses are roughly 50% of gross income.
Gross monthly rent: $4,300 → Operating expenses: ~$2,150 → NOI: ~$2,150.
How It Works
The 50% rule skips detailed expense modeling and assumes half of gross rent goes to taxes, insurance, repairs, utilities, management, and vacancies.
Example:
- Gross scheduled income: $4,300/month
- 50% rule estimate: 50% × $4,300 = $2,150 NOI/month = $25,800/year
- At 6% cap rate, property value: $430,000
When It's Accurate
The 50% rule works best for:
- Mid-condition 2-4 unit buildings in Midwest/South
- Properties with property management (not self-managed)
- Real expense benchmarks in the $14-18k/year range
When It Breaks
- Newer buildings: expenses lower, maybe 35-40%
- Old buildings (pre-1960): expenses higher, 55-65%
- Expensive markets (NYC, CA): property taxes alone can be 25-35% of rent
- Self-managed properties: you might run at 40% expenses, but you're trading income for sweat
The Combo Move
Use 1% rule to filter properties (< 0.8%? Skip it). Then use 50% rule to quickly estimate NOI without a pro forma. Then — and only then — do actual modeling in a spreadsheet or calculator.
Example flow:
- See listing: $320,000 asking, $3,800/month rent
- 1% check: $3,800 ÷ $320,000 = 1.19% ✅ (worth looking at)
- 50% rule: 50% × $3,800 = $1,900 NOI/month → ~$23k/year
- Quick cap rate: $23,000 ÷ $320,000 = 7.2% (solid)
- Now you schedule a showing and run actual numbers
The Reality
The 1% and 50% rules are correct about 70% of the time in average markets. They're screening tools, not appraisal reports. Use them to eliminate obvious duds and identify properties worthy of deeper analysis.
Just don't make a $300,000 commitment based on them.