The New (Better) 1% Rule for Real Estate

**Dave Meyer** (0:00)
This is the new 1% rule for real estate investors. For decades, investors used the 1% rule to pick markets and properties. If a house's rent was more than 1% of the purchase price, it would probably cash flow. But today, 1% rule deals are almost impossible to find in most places. And that rule was created when interest rates and insurance payments and property taxes were much lower. Recently, I've been using a new, different metric, the rent to payment ratio. It's rent divided by your full mortgage payment, including principal, interest, taxes, and insurance. And in my own deal analysis, it's been a much more reliable predictor of cash flow in 2026 So today, I'm going deep on this 1% rule 2.0.
What it does and doesn't reveal about a property, the sweet spot ratio I'd target instead of just chasing the highest number and the full ranking of the top rent to payment markets across the US. This is the new cash flow math you need to know.
What's up, everyone? I'm Dave Meyer, Chief Investment Officer at BiggerPockets. And today, I'm going full data nerd on you guys with a new investing metric, the rent to payment ratio. Now, if you're investing back in the 2010s or even a couple of years ago, you may have heard of a rent to price ratio or you may have heard of the one percent rule as a rule of thumb for measuring cash flow.
That rule of thumb is exactly what it sounds like. You would compare one month of rent to the purchase price of a property. And if it was at or near one percent, your deal was probably going to cash flow. If it was higher than one percent, you were probably getting a great cash flowing deal. And it was a really useful metric for a really long time. During the 2010s when interest rates were lower and taxes were lower and insurance was lower, it worked really well.
But it has become a little bit outdated. I personally haven't used rent to price ratios in my own underwriting analysis for a while, because I don't think it actually tells me that much anymore. First and foremost, it's really hard to find 1% ruled deals right now, and it can be really discouraging using a benchmark from a different era when cash flow was easier to find in today's market, because you're probably missing good deals and good opportunities using an outdated metric. The other thing is that sometimes now when you use rent to price ratio, you might find a deal that looks really good by rent to price. But if it's in an area that has super high property taxes or super high insurance, it might not actually cash flow, and you could actually be getting a positive because of an outdated metric. So instead, I created a new metric. It is a slight variation on a debt service coverage ratio. If you're familiar with that or if you've used a DSCR loan before, this will be very familiar to you. I didn't make this up out of thin air. But what I did was pull together a bunch of different data sources that don't normally talk to each other to create this new metric.
What it is, is the rent to payment ratio. So instead of comparing rent to the purchase price of a property, what I'm doing is comparing the rent to what you're actually paying to your mortgage company each and every month. This is also known as your debt service. That's why it's similar to a debt service coverage ratio. Your full debt service includes your principal, that's paying down your mortgage, interest, that's the profit that goes to the bank, your taxes, super important in this new era of real estate, right? Because taxes have gone up a lot. And insurance, also really important in this new era of real estate, that has gone up a lot, particularly in some markets that are prone to natural disasters. By doing this, you're better incorporating the expenses that investors are facing on a day-to-day basis. Instead of just saying that the purchase price of a property is indicative of what your expenses are going to be, this actually measures the majority of your expenses. But it is not a substitute for underwriting your deal. Once you've looked at these deals and thought, okay, this one has at least the benchmark level of cash flow that I am looking for, that's when you go, put it in the BiggerPockets calculator, do the full analysis, understand how this deal is going to add to your portfolio, how it's going to move you towards financial freedom over time. You can't substitute that stuff. You got to do it. But by using this rent to payment ratio, you're going to be able to look through markets and deals so much quicker. So if you want to calculate this for yourself, it's actually quite easy. All you need to know is one month of rent and your total mortgage payment. So if you're looking at a deal, just estimate the rent, estimate what the mortgage payment is going to be, divide the rent by the mortgage payment, and you got it. The higher the number, the better cash flow potential it's going to have. And actually, we'll talk about this in a minute, but 1% is actually a pretty good benchmark, similar to the rent to price ratio, for this new metric. If you are getting a 1% rent to payment ratio or better, you're going to cash flow. But you do not need to get 1%.