Cap rate vs the 1% rule
The 1% rule asks whether monthly rent is at least 1% of total acquisition cost. It takes five seconds and ignores taxes, insurance, vacancy and management entirely. Cap rate is the number the property actually produces once those are paid.
Side by side
| Cap rate | 1% rule | |
|---|---|---|
| Formula | NOI ÷ property value | Monthly rent ÷ (price + rehab) ≥ 1% |
| Includes | Every operating expense and a vacancy haircut. | Rent and price. Nothing else. |
| Use it for | Deciding whether to buy. | Deciding what to underwrite. |
Why the difference matters
A property can pass the 1% rule and lose money, and it happens most often where property taxes are high. Rent at 1% of price means little in a jurisdiction taking 2.5% of assessed value every year.
The mistake to avoid
Treating the rule as a standard rather than a filter. In many US markets almost nothing passes it, and a screen that rejects everything is not telling you the market is bad — it is telling you the screen is too blunt for that market.
Worth knowing
- The rule uses total acquisition cost, price plus rehab, not the price alone.
- It says nothing about property tax, which is the expense that varies most between markets.
- The 2% rule is the same idea at an aggressive threshold and is rare in practice.
- Use it to decide what to underwrite properly. Never use it to decide what to buy.