The financial guideline known as the "1% rule" is also formally referred to as the One Percent Rule.
Understanding the One Percent Rule
The One Percent Rule, often stylized as the "1% rule," is a commonly used benchmark in the field of real estate investment.
According to the provided definition, the One Percent Rule is specifically used to determine if the monthly rent earned from a piece of investment property will exceed that property's monthly mortgage payment. This makes it a quick initial test for potential investment properties.
How the Rule Works in Practice (Based on Reference)
Applying the One Percent Rule, as described, involves comparing two key financial figures for an investment property:
- The total monthly rent you expect to collect from the property.
- The total estimated monthly mortgage payment for the property (which typically includes principal, interest, taxes, and insurance - PITI).
The rule serves as a test to see if the first figure is larger than the second:
- Is the Monthly Rent > Monthly Mortgage Payment?
If the monthly rent surpasses the monthly mortgage payment, the property is considered to pass this test according to the rule's application described.
This comparison provides investors with a simple method to quickly gauge whether a property is likely to generate positive cash flow from rental income relative to its primary financing cost. It's a useful preliminary screening tool before conducting more detailed financial analysis.
