What’s the 1% Rule and Does It Still Work?

Investor Shortcut

Today’s question comes from Dan in SilverLakes:

“Mike, I’ve heard of the 1% Rule for buying rentals. What is it exactly, and does it still make sense in today’s market?”

The 1% Rule is one of the most well known shortcuts in real estate investing.

But in a high priced, high interest market like Pembroke Pines, it’s not always the right measuring stick.

What the is 1% Rule

The 1% Rule says a rental property should bring in 1% of its purchase price every month.

So if a home costs $400,000, it should ideally rent for $4,000/month.

The idea is that if the rent hits that number, there’s a good chance you’ll have positive cash flow after expenses.

But let’s get real: in Pembroke Pines, most homes don’t hit that.

A $500,000 house might rent for $3,200/month or just 0.64%.

So investors now rely on something more precise: a pro forma.

What’s a Pro Forma?

A pro forma is just a fancy word for a financial forecast.

It breaks down:

• What you bring in (rent, fees)

• What you spend (mortgage, taxes, insurance, repairs, etc.)

• And what’s left over

Here’s a simple example of a pro forma on a $500,000 home:

• Rent: $3,200/month

• Mortgage (7% interest, 20% down): ~$2,660/month

• Property Taxes & Insurance: ~$700/month

• Maintenance & Reserves: ~$200/month

• Property Management (optional): ~$320/month

Total Expenses: $3,880/month
Monthly Cash Flow: -$680/month

Ouch, right?

But if you buy with cash, get a better rate, or rent at a premium that number can shift fast.

And even negative cash flow can sometimes make sense when you factor in appreciation and tax benefits.

What I’d Tell a Friend

If you’re thinking about buying a rental, don’t obsess over the 1% Rule.

It’s a decent first filter, a quick way to screen for properties that might cash flow, but it won’t tell you the full story.

Especially in a place like Pembroke Pines.

What will help is looking at a basic pro forma.

Even just back of the napkin math can show you whether you’re buying an income stream or a monthly headache.

Run the numbers, not just the rule.

— Mike

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