The 1% Rule Retired in 2018. What Replaced It.

TL;DR

✦ The 1% rule (monthly rent ≥ 1% of purchase price) worked when rates were 4% and insurance was cheap. ✦ At 7% rates and 2× insurance costs, 1% rent doesn't cover PITI on most properties. ✦ The replacement: DSCR ≥ 1.20 + Cash-on-Cash ≥ 6-8% as dual floors. ✦ Reverse-engineer max purchase price from those floors. The 1% rule is dead.

What the 1% rule was

The 1% rule emerged in 2010-2015 as a screening shortcut. The idea: if monthly rent is ≥ 1% of purchase price, the property is likely to cashflow.

Example: $200K property → $2,000/mo rent → meets 1% rule.

For a 2010 era investor, the math behind it was:

• 30-yr rate: 4%
• PITI on $200K (with 25% down): ~$1,150/mo
• Operating expenses: ~$400/mo
• Total: $1,550/mo
• Rent: $2,000/mo
• Cashflow: $450/mo

The 1% rule was a fast proxy for "this will cashflow." It worked well in that era.

What broke it

Break 1: Rates moved 4% → 7%

PITI on the same $200K property in 2026 (25% down, 7.1% rate):

• Principal + Interest: ~$1,005/mo
• Tax (post-reset): ~$280/mo (varies)
• Insurance: ~$200/mo (varies)
• Total PITI: ~$1,485/mo

Compared to 2010: PITI is up ~$335/mo on the same property. The 1% rent ($2,000) no longer covers PITI plus operating expenses with cashflow margin.

Break 2: Insurance doubled

Insurance was $80-$120/mo in 2010-2018 for typical SFRs. In FL/CA/TX coastal, it's $250-$450/mo in 2026. Add another $130-$330/mo to operating costs.

The 1% rule didn't anticipate insurance line items doubling.

Break 3: Property tax pressures

Reassessments tightened. FL, TX, GA all saw aggressive post-sale resets. Tax bills jumped 30-50% after sale. The 1% rule didn't model post-reset.

The new math

Same $200K property in 2026:

• PITI: $1,485/mo
• Operating expenses (PM, vacancy, CapEx, maintenance): $640/mo
• Total: $2,125/mo
• 1% rent ($2,000): $2,000/mo
• Cashflow: -$125/mo

The 1% rule put you in a negative cashflow deal.

The replacement: dual floors

Operators replaced the 1% rule with two simultaneous floors:

Floor 1: DSCR ≥ 1.20 base, ≥ 1.0 stressed

The lender's number. If this fails, the loan dies.

Computation: NOI ÷ annual debt service.

Floor 2: Cash-on-cash ≥ 6-8% (market-dependent)

The wallet's number. If this fails, your capital grows faster elsewhere.

Computation: annual cashflow ÷ total cash invested.

Why dual floors

Each floor catches a different failure mode. DSCR alone passes deals where you survive but make nothing. CoC alone passes deals that the bank won't fund. Together they bracket what an actual operating deal looks like.

A property that clears both is a real deal. A property that fails either is not.

How to apply the replacement

Step 1: Set your floors before the deal

DSCR base: 1.20 minimum. DSCR stressed (rate +200bps): 1.0 minimum. CoC: 6% appreciation markets, 8% cashflow markets.

Write them down. They don't change on deal #5 because you're emotional.

Step 2: Reverse-engineer max purchase price

Given a property's NOI and your loan terms, what's the max purchase that pulls DSCR to 1.20 base?

Given a property's cashflow and your reserve requirements, what's the max purchase that pulls CoC to 6-8%?

The binding constraint (whichever produces the lower max) is your offer ceiling.

Step 3: Walk above the ceiling

If the seller won't accept your max, walk. The next deal is always coming.

Worked example: 1% rule vs dual floors

A $215K SFR in Memphis, asking $215K, rent $1,950/mo (matches 1% rule almost exactly).

1% rule check: $1,950 / $215K = 0.91%. Below 1%. The 1% rule says walk.

Dual-floor check:

• Estimated NOI: $14,400/yr (after operator-rebuilt expenses)
• Debt service at 7.1% on $161K loan: $13,096/yr
• DSCR base: 1.10. Below 1.20 floor. Walk.

Both screens reject the deal. But the dual-floor screen also tells you why (DSCR, not "rent ratio") — which lets you negotiate.

Counter-offer math:

• DSCR floor 1.20 → max debt service = $14,400 / 1.20 = $12,000/yr
• Max loan at 7.1%, 30-yr = $147,750
• Max purchase at 75% LTV = $197K

Counter at $190K (3.5% under max to leave margin). Walk above $197K.

Dual floors give you the negotiating wedge. The 1% rule just says "no" without telling you what to offer.

When the 1% rule is OK

Only as a screening shortcut, not as your actual underwriting:

• "If rent is < 0.7% of price, don't even bother running DSCR" — yes, fine.
• "If rent is between 0.7% and 1.5%, compute DSCR and CoC properly" — yes, fine.
• "If rent is > 1.5% of price, it's likely a deal but verify" — yes, fine.

The 1% rule is no longer the decision criterion. It's a filter for what deserves real underwriting.

Run this in Vricko

Vricko's Underwriter computes DSCR and CoC simultaneously, with the max purchase price that clears both floors as the headline output. The 1% rule isn't part of the workflow because it doesn't apply.

Try Vricko →

The honest take

Heuristics outlive their assumptions. The 1% rule was good. It served its era. It is not a 2026 underwriting standard.

Operators replace shortcuts with floors. The floors catch reality. The shortcut catches the past.

Keep reading

• The 8 Numbers Every Deal Must Pass
• Cap Rate vs DSCR vs Cash-on-Cash
• Why Your 'Cash-on-Cash' Calculation Is Lying to You

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