Platform · Glossary
The 1% rule.
The 1% rule is a quick screening ratio that compares monthly rent with a property’s asking price. Under the traditional rule, a property clears the screen when its monthly rent is at least 1% of its price.
A $200,000 property producing $2,000 per month in rent clears the traditional 1% screen. A $300,000 property producing the same rent does not.
How 3Y calculates it
3Y calculates the 1% rule against the asking price, using monthly rent after the stated vacancy allowance rather than gross scheduled rent.
1% rule = Effective monthly rent ÷ Asking price
For a multi-unit property:
Effective monthly rent = Monthly rent per unit × Number of units × (1 − Vacancy rate)
For example, a four-unit property with $1,000 monthly rent per unit and a 5% vacancy allowance has $3,800 of effective monthly rent. At a $400,000 asking price, it produces a 0.95% screening ratio.
How 3Y uses it
In a 3Y analysis, the 1% rule is a supporting deal metric: a fast way to understand how the asking price relates to current modeled rent.
It is not the 3Y Estimate™, and it does not determine the goal-convergent price. The 3Y Estimate solves for the price supported by the investor’s selected goal using the deal’s modeled income, expenses, and financing terms.
The 1% rule answers:
How does the asking price compare with the property’s effective monthly rent?
The 3Y Estimate answers:
How much can I pay and still reach my selected goal under the current assumptions?
Why it is only a screen
The 1% rule is intentionally simple. It does not account for:
- property taxes;
- insurance;
- repairs and maintenance;
- capital reserves;
- management costs;
- financing terms;
- debt service; or
- the investor’s selected goal.
Two properties can have the same 1% ratio and very different investment outcomes once their expense burden and financing structure are considered.
Use the 1% rule for a quick first read of asking price relative to rent. Use the deal metrics to understand the financial profile, and use the 3Y Estimate™ to see the goal-convergent price supported by your assumptions and selected goal.