What the 1% rule is for
The 1% rule says gross monthly rent should equal at least 1% of purchase price. A $7,500,000 property should produce $75,000 a month. It is a screen, not an analysis, and its entire value is speed. It takes five seconds and removes deals that were never going to work.
Where the rule breaks down
The rule ignores expenses, and expenses are where multifamily deals are actually won or lost. Two properties at an identical 1.0% ratio behave completely differently when one runs a 38% expense ratio and the other runs 52%. The second one has no cash flow.
It also ignores everything below the operating line. Financing terms, capital needs, property taxes after reassessment, and insurance in coastal markets all move the outcome more than the ratio does. Insurance alone rose sharply across the Gulf and Southeast, and a deal clearing 1.0% in Houston has a very different cost structure than one clearing 1.0% in Columbus.
Most importantly, the rule was calibrated in a lower rate environment. At 5.30% agency debt, a property at exactly 1.0% frequently produces thin or negative levered cash flow after real expenses. The screen has not moved, but the math underneath it has.
How to use it without being misled
- Use it to reject, never to accept. Below 0.6% in most markets, stop. Above 1.0%, keep going. It earns you nothing beyond that.
- Use gross scheduled rent for the whole property, before vacancy and concessions, so the screen stays comparable across deals.
- Adjust the threshold to the market. Midwest and secondary markets often clear 1%. Coastal and primary markets rarely do, and rejecting every deal there on this basis removes a whole strategy from your pipeline.
- Never present it to a lender or an LP. It is a personal filter, not an underwriting metric.
What replaces it
Once a deal clears the screen, the metrics that decide it are cap rate for pricing, DSCR for financeability, and cash-on-cash for what you actually earn. Those need a real NOI, which means normalizing the broker T-12 first.