Folks, I'm 60 years old and I taught high-school English for ten years before I ever got into this business, so I'll tell you up front: I am not a spreadsheet wizard. But I've walked enough Illinois properties with my students — Rockford two-flats, Peoria singles, a 120-year-old triplex over in Decatur — to know exactly what the 1% rule is good for and exactly where it'll lie to you.
Here's the short version, because I know you came here for an answer and not a webinar: the 1% rule is a screening tool, not a buying decision. It tells you which properties are worth a closer look. It does not tell you whether a property will make you money. Treat it as the first filter and you'll do fine. Treat it as the final word and it'll hand you a deal that bleeds $200 a month while looking great on paper.
What the 1% rule actually says
The rule is simple enough that you can run it in your head while you're standing in the driveway. A rental is worth a second look if the monthly gross rent is at least 1% of the all-in purchase price.
- A $100,000 house needs to bring in at least $1,000 a month.
- A $150,000 house needs at least $1,500 a month.
- That Decatur triplex I keep mentioning? One of my clients was all-in around $105,000 and it rented for $2,000 a month. That's nearly 2%. The rule lit up green.
That's the whole thing. It's a price-to-rent ratio, nothing fancier. Notice I said gross rent. That's what the tenant hands you before a single bill gets paid, not your take-home. I'll come back to why folks blow this, because it's the most common mistake I see.
The numbers are sacred. People lie about numbers all the time, but the numbers themselves don't lie. The trick is feeding the rule honest ones.
Why the rule exists in the first place
The 1% rule didn't fall out of the sky. It's shorthand from a time when a property bringing in 1% of its price every month had a fair shot at cash-flowing after the mortgage, taxes, insurance, vacancy, repairs, and management all took their bite.
Walk the math. Say you put 20% down on a $100,000 house on a 30-year note. Depending on your rate, the principal and interest might run $450 to $550 a month. Stack on property taxes, insurance, and a little set aside for vacancy, and you're looking at $700 to $900 a month in fixed and semi-fixed costs before you've fixed a single leaky faucet. At $1,000 in rent, you've got daylight. At $700, you're underwater and you don't know it yet.
That daylight at 1% is the whole reason the rule caught on. It was a ratio where, back when it was coined, the numbers usually worked. The catch is two words: usually and back when.
Where the 1% rule earns its keep
I still use it, and I'll tell you exactly where it pulls its weight: smaller and mid-size markets where deals at that ratio still exist. That's a lot of Illinois outside the Chicago collar — Rockford, Peoria, Decatur, the smaller towns along the rivers where prices stayed reasonable and renters still need a roof.
In a market like that, the 1% rule lets me thin the herd fast. I can run a list of twenty listings, knock out the fourteen that don't clear the bar, and spend my real time on the six that do. That's its job. It's not deal analysis. It's the bouncer at the door deciding who even gets to be analyzed.
Three things I'd nail down before you trust your own screen:
Use gross rent, not net. The rule is built on gross, meaning total rent collected. I've watched newer folks run 1% against their net number and then scratch their heads when a property that "passed" won't cash-flow. Of course it won't. You filtered it on the wrong number.
Use the all-in cost basis, not the sticker. If you're buying a $90,000 house that needs $20,000 of work before a tenant can move in, your basis is $110,000. Run 1% on $110,000. This is the same discipline behind any BRRRR-style deal where you buy, rehab, and refinance. The rehab is part of what you paid, so it's part of what you measure against.
Watch the gap between price and value. If you're buying well under market, the rule against your low purchase price can look fantastic while the property is still a dog for its rental neighborhood. The rule sees your price. It can't see whether the neighborhood will ever carry the rent.
Where the 1% rule will lie to you
This is the part I wish somebody had drilled into me twenty years ago. The 1% rule is a filter, not deal analysis, and conflating the two is how good people buy bad houses.
Interest rates aren't in the rule. The rule was born in a cheaper-money era. The debt service on a $100,000 house at 4% is a different animal than at 7.5%. A property that cash-flowed comfortably at the 1% line with a 4% note can break even or lose money at 7.5%. The rule won't update itself for your rate. You have to do that by hand, every time.
Property taxes vary wildly, and Illinois is the cautionary tale. This is where I have to be honest about my own backyard. Illinois carries some of the highest property taxes in the country. In plenty of Illinois counties you'll see effective rates north of 2%, and in some you're brushing up against 2.5% to 3% of value every single year. On a $150,000 house, 2.5% is $3,750 a year. That's better than $300 a month gone before you've covered anything else. A house that hits 1% in low-tax Indiana an hour away can look identical to a 1% house in my county and earn you half as much. The rule cannot see the tax bill. Your county assessor's website can. Go look it up before you fall in love.
Repairs and big-ticket replacements aren't in the rule. That 1% screen has no idea how old the roof is, whether the furnace is original, or what the wiring looks like behind the plaster. A triplex built in 1900 is not the same investment as one built in 2002, even if both rent for the same money. The rule can't tell them apart. Your inspection can, and your maintenance reserve had better.
Management isn't in the rule either. If you manage it yourself, that labor is real even if it never shows up on a bank statement. It comes out of your evenings and weekends. If you hire it out, you're typically handing over 8% to 10% of collected rent, and that bite can turn a property that technically "passes" the 1% rule into a flat or losing deal.
The real calculation the rule is pointing you toward
Once a property clears the filter, the actual work starts. Here's the honest math I run, and there's nothing exotic in it:
- Annual gross rent — every dollar collected from every unit at normal occupancy.
- Vacancy reserve — most of my markets handle a 5% to 10% assumption. Subtract it. Nobody's units stay full forever.
- Operating expenses — taxes (look them up, don't guess), insurance, a maintenance reserve (figure roughly $1,200 to $2,000 a year per unit on older stock), management if you're paying it, and any utilities you cover.
- Net operating income — gross rent, minus vacancy, minus operating expenses. This is the property's earning power before the bank gets involved.
- Debt service — your monthly principal and interest, times twelve.
- Cash flow — net operating income minus annual debt service. Positive, it feeds you. Negative, you feed it.
If you want the longer version of how these pieces stack into an actual return, I broke down the four ways real estate investors actually make money. Cash flow is only one of them, and the 1% rule only ever speaks to that one.
A real Illinois example
Let me put numbers on it, because the numbers are sacred and an example beats a lecture.
That Decatur triplex one of my clients bought was built in the late 1800s, fully occupied with long-term tenants who treat it like home. All-in around $105,000. Gross rent of $2,000 a month, so it screams at the 1% screen at nearly 2%.
Now run it for real. After property taxes (this is Illinois, remember, so they take a real chunk), insurance, a vacancy reserve, and a maintenance line that respects a building old enough to have seen the Model T, the net lands around $825 a month. Call it $9,900 a year in cash flow, on a place with about $72,000 left on the mortgage. That's a genuine return on a building that earns its 1% rating honestly, not a paper one.
But here's the question that actually came up when we sat down together: should they sell that triplex and roll the equity into something bigger? That's a completely different analysis. Now you're weighing appreciation, the tax hit on a sale (which is exactly where a 1031 exchange to defer the capital gains enters the conversation), and the opportunity cost of leaving equity asleep in a small triplex. The 1% rule got them in the door on that property years ago. It has absolutely nothing to say about whether they should sell it today.
The right way to use it
Here's how I'd leave it with you. Use the 1% rule to thin the herd. Move fast past the properties that don't clear it, because life's too short to analyze houses that can't math. Slow down and run the full numbers on the ones that do.
And never, ever buy because something "passes the 1% rule." Buy because the whole picture works: price, rent, real taxes, real repairs, your actual financing, and the actual condition of the actual building. The rule is the first question in the conversation, not the answer. If you want a clear-eyed look at what investors in this game really take home once all those costs are paid, that's worth your time too, because the 1% rule speaks to the gross, and you live on the net.
The numbers tell the real story. The 1% rule just tells you which properties deserve to be asked the next question. Ask it honestly, feed it clean numbers, and it'll do its small job well.
Chris Albin and CRARE Instruction do not guarantee any level of money, success, or lifestyle from learning any of the strategies discussed here. The information in this post is of a general nature and is not intended to replace specific advice you may receive from a licensed professional for legal, financial, or business decisions. Individual results will vary depending on several factors, including your starting point, your effort, and your resources. All information is believed to be true and accurate, and is subject to change without notice.
