how the one percent rule works
this simple calculation multiplies the purchase price of the property plus any necessary repairs by 1 the result is a base level of monthly rent it s also compared to the potential monthly mortgage payment to give the owner a better understanding of the property s monthly cash flow this rule is only used for quick estimation because it doesn t take into account other costs associated with a piece of property such as upkeep insurance and taxes example of the one percent rulean investor is looking to obtain a mortgage loan on a rental property with a total payoff value of 200 000 using the one percent rule the owner would calculate a 2 000 monthly rent payment 200 000 multiplied by 1 in this case the investor would seek a mortgage loan with monthly payments of less than and absolutely no more than 2 000 the one percent rule vs other types of calculationsthe one percent rule also helps give an investor a base point from which to consider other factors regarding the ownership of a property a second important calculation is the gross rent multiplier which uses the monthly rent level to determine the amount of time it will take to pay off the investment this calculation is achieved by dividing the total borrowed value by the monthly rent in the example of the home with a value of 200 000 the investor would divide 200 000 by 2 000 this gives the investor a 100 month payoff period which translates to a little over 8 3 years investors can also use the gross rent multiplier when considering the payment schedule terms of a loan taken for the property the 70 rule implies that an investor should not pay more than 70 of the property s estimated value after repairs fewer costs special considerationsin calculating the gross rent multiplier a buyer must also consider the rental rates in the area in which the property is located if the standard rate for rent in the neighborhood is less than 2 000 for the buyer in this example the investor might have to consider decreasing the rent to ensure that they find a tenant another important factor to consider is maintenance on the property the property owner is responsible for upkeep and repairs while a deposit might cover substantial damages it s also important for the owner to budget a specified amount of the rent for savings toward maintenance this can contribute to profits if it s unused and the money would be available when any maintenance needs arise overall investing in real estate can be lucrative for long term investors the base rent that an owner charges on any type of property sets the level of payments expected by tenants owners typically raise rent annually to manage inflation and other costs associated with the property but the base rate is an important level that determines the overall return on an investment 