What is ‘One Percent Rule’
A rule of thumb used to determine if the monthly rent earned from a piece of investment property will exceed that property’s monthly mortgage payment. The aim of the one percent rule is to have the rent be greater or equal to the mortgage payment, so the investor breaks even on the property at worst. The rule is used for quick estimation, as there are other costs associated with a piece of property that are not taken into account, such as upkeep, insurance and taxes.
Explaining ‘One Percent Rule’
Purchasing a piece of property for investment requires a thorough analysis of future rents compared to the cost of owning that property. Property owners want to maintain a cash flow greater than costs. For example, an investor is looking to purchase a home valued at $200,000, with the goal of renting the home out for income. After placing 20% down, the investor has a mortgage of $160,000. The one percent rule says that the home would have to be rented out for no less than $1,600 per month ($160,000 * .01).
Further Reading
- Restraining yourself: the implications of fiscal rules for economic stabilization – link.springer.com [PDF]
- Institutional development, financial deepening and economic growth: Evidence from China – www.sciencedirect.com [PDF]
- The role of the exchange rate in monetary-policy rules – pubs.aeaweb.org [PDF]
- The “five percent rule” for improved water service: can households afford more? – www.sciencedirect.com [PDF]
- The Taylor rule and optimal monetary policy – pubs.aeaweb.org [PDF]
- Keeping it simple: Financial literacy and rules of thumb – www.aeaweb.org [PDF]
- Defending the one percent – www.aeaweb.org [PDF]
- Reinvested Earnings Bias, the'Five Percent'Rule and the Interpretation of the Balance of Payments-with an Application to Transition Economies – papers.ssrn.com [PDF]
- Monetary-policy rules and the great inflation – pubs.aeaweb.org [PDF]
- Law, finance, and economic growth in China – www.sciencedirect.com [PDF]
