How to Decide if an Investment Property is the Right Decision: The 1% Rule

Investing can offer rewarding opportunities for steady income and long-term financial growth. However, it's not a decision to take lightly. Whether you're considering your first investment property or expanding an existing portfolio, careful analysis is crucial. Understanding popular investment strategies, such as the 1% Rule, can help determine if an investment property is the right decision for you.

The 1% Rule

A commonly used tool in evaluating investment properties is the 1% Rule, which helps investors quickly assess whether a property is likely to be profitable.

What Is the 1% Rule?

The 1% Rule is a simple guideline used to determine if the monthly rent earned from an investment property will exceed that property's monthly mortgage payment. According to this rule, the monthly rent should be at least 1% of the property’s purchase price. For example, if you buy a property for $200,000, the rent should be at least $2,000 per month to meet the 1% Rule.

How Does the 1% Rule Work?

The idea behind the 1% Rule is to ensure that the rental income will cover the mortgage and other associated costs, such as maintenance, taxes, and insurance, ideally leaving some profit. While this rule doesn’t account for all potential expenses, it provides a quick and easy way to screen properties.

Does the 1 % Rule Work For You?

 The 1% Rule can be a helpful starting point, especially for new investors. However, it’s important to consider the specific market conditions in your area. In some high-demand markets, finding properties that meet the 1% Rule can be challenging. Additionally, this rule doesn’t take into account other critical factors, such as vacancy rates, property appreciation potential, or unexpected expenses.

Deciding whether to invest in a property requires a thorough understanding of the strategies and tools available to you. Both the BRRRR method and the 1% Rule offer valuable frameworks for evaluating potential investments, but they each come with their own set of advantages and limitations. It’s important to assess your financial situation, risk tolerance, and market conditions before making a decision. Consulting with a real estate professional can also provide additional insights, ensuring that your investment aligns with your long-term financial goals.