What is the One Percent Rule?

Who wants to make an investment that doesn’t yield a return? Certainly not real estate investors. They have formulas to assure their success as much as possible. One favorite is the one percent rule.

Rocketmortgage.com explains that the one percent rule “measures the price of the investment property against the gross income it will generate.” That means that an investment must generate at least 1% or more in rental income based on the original purchase price. The rule continues as the investment property appreciates in value, which means the potential for profit in the form of higher rent is even greater.

To find a property that will be profitable, multiply the purchase price of the property by 1%. Another way to calculate it is to move the “comma in the purchase price to the left two spaces.” The result should be the minimum you charge in monthly rent. If the property requires any repairs, you’ll also want to factor them into the equation by adding them to the purchase price, then multiplying the total by 1%.

If you want to buy an investment home for $300,000, you should be able to collect $3,000 in rent. Ask your Berkshire Hathaway HomeServices network agent to provide a comparative market analysis of nearby similar properties so you can compare purchase prices and rental prices for those properties.

For greater accuracy, include the costs to renovate and repair the property, and to bring it up to modern building codes for safe habitation.