Percentage Rules of Real Estate Investing

Real estate investing is full of percentage-based rules of thumb that investors use to quickly assess deals. While these aren't hard-and-fast rules, they can serve as useful filters or benchmarks. Here's a breakdown of the most commonly cited ones:

Rule Description Purpose
1% Rule Monthly rent should be at least 1% of the purchase price. E.g., $150,000 property should rent for $1,500/mo. Quick cash flow filter.
2% Rule Rent should be at least 2% of the purchase price. Mostly only achievable in lower-cost markets. Aggressive cash flow target.
0.5% Rule Conservative version of the 1% rule for expensive markets. E.g., $500,000 property should rent for $2,500/mo. Used where appreciation is prioritized over cash flow.
50% Rule Estimate that 50% of rental income will go to expenses (excluding mortgage). Used to quickly estimate net operating income (NOI).
70% Rule For flips: Only pay up to 70% of ARV (After Repair Value) minus repair costs. Used by house flippers to ensure profit margin.
75% Rule Similar to 70%, but sometimes used in hotter markets. A looser version of the 70% rule.
80% LTV Rule Limit loans to 80% loan-to-value to avoid PMI and reduce risk. Common lending threshold.
1.25x DSCR Rule Net Operating Income (NOI) should be at least 1.25× the debt payments. Standard for mortgage underwriting.
4% Rule In retirement, you can withdraw 4% of your portfolio yearly. Applied to rental cash flow for financial independence. FIRE investors often use this with real estate.
7% Rule Total annual return (cash flow + appreciation) should be at least 7%. A benchmark for evaluating investment performance.
200% Rule (1031) You can identify any number of properties as long as their total value doesn't exceed 200% of the property sold. IRS rule for 1031 tax-deferred exchanges.

Note: Apply with Caution

  • These rules are shortcuts, not full analyses—always verify with real numbers.
  • Markets differ. What works in one city might not apply elsewhere.
  • These rules are useful for screening, but full underwriting should follow.