Rental Property 1% Rule Reality Check
Example: Purchase price: 280000 $ · Gross monthly rent: 2200 $ · Vacancy rate: 7 % · Property management fee: 8 % of EGI · Maintenance & repairs: 10 % of EGI · CapEx reserve (roof, HVAC, etc.): 5 % of gross rent · Annual landlord insurance: 1400 $ · Annual property tax: 3500 $ · Down payment: 25 % · Mortgage rate: 7 %/yr
| Cash-on-cash return | -4.08% |
| Cap rate | 4.97% |
| Annual net operating income | $13,913 |
| Annual cash flow (after debt service) | $-2,853 |
| Rent as % of the 1% rule threshold | 78.57% |
Worked example
A $280,000 property renting for $2,200/month (0.79% — below the 1% threshold of $2,800). Effective gross income after 7% vacancy: $24,492. Subtract management (8%), maintenance (10%), CapEx (5%), insurance ($1,400), and taxes ($3,500) — NOI comes to about $13,100. Cap rate: 4.7%. With 25% down ($70,000) and a 7% mortgage, debt service is $16,752/year — producing a negative cash flow of -$3,652/year. The 1% rule screen was right to flag this one.
Frequently asked questions
Is the 1% rule a reliable investment filter?
It is a 30-second screen, not an investment decision. It works reasonably well in mid-tier markets but often fails in high-cost coastal markets (where 0.5% is common) and may understate profitability in low-cost markets (where 1.5–2% is achievable). Always run the full expense model before deciding.
What cap rate should I target for a rental property?
Cap rates vary significantly by market and property class. A cap rate above 5% is often considered a reasonable baseline for residential rentals, but cap rates in competitive markets may be 3–4%. The cap rate that makes sense depends on your local market, financing costs, and alternative investments.
What expenses do most beginner landlords underestimate?
CapEx reserves top the list — big-ticket items like roofs ($8–$15k), HVAC ($5–$10k), and water heaters ($1–$3k) need to be funded before they fail. Property management (often 8–10% of rent) and vacancy (a realistic 5–10%) are also routinely omitted from back-of-napkin calculations.