One Percent Rule

Some kids dream of being doctors or teachers or astronauts when they grow up. But ever since we were little, all we’ve ever wanted to be is a landlord. It’s our dream. And now that we’re finally in a position to buy some real estate and make our dream come true, we need to be sure that we’ll make enough in rent to cover the purchase price of the rental home.

One quick way to figure this out is to use the “one percent rule.” We take the purchase price of the real estate in question, add any necessary repairs, and then multiply by 1%. That is the absolute minimum we could charge for rent and still cover our basic expenses.

Let’s do some math. Let’s say the house we want to buy costs $175,000. We know for sure that it needs a new roof—let’s say $10,000 for that—and a new garage door. That’s another $1,000. If we add all that together, we get a total cost of $186,000. Multiplied by 1%, that’s $1,860. We’d need to charge at least $1,860 in monthly rent.

Now we should point out that our estimate is just that: an estimate. It doesn’t take into account any other additional costs or repairs. So if something unexpected happens, like the hot water heater goes out, we haven’t planned or accounted for that here. Likewise, if we plan on paying monthly landscaping fees, or if the house is in a neighborhood with an HOA, we haven’t accounted for that either.

And we should also point out that we’re not making a profit on $1,860 a month. Before we buy this place, we should check out the local rental market and find out if we can charge a little more per month, like, say, $2,000 or more. That way, we’re more than covering our expenses, plus we’ve got a little cushion for unexpected stuff like the hot water heater. And if the unexpected stuff ends up costing less than our cushion allows for, we stand to make a nice little profit every month.