The 1% rule is a fast way to see if a rental property might make money. In plain English, the monthly rent you can charge should be at least 1% of the price you pay for the house. If a £200,000 home nets you £2,000 a month in rent, the rule says it could be a decent deal.
Think of the rule as a first‑pass filter. You don’t need a spreadsheet or a mortgage calculator to spot a red flag – just a quick glance at the asking price and the current market rent. For example, a two‑bedroom flat in Manchester listed at £150,000 should be able to command around £1,500 a month. If listings show only £1,000 a month, the property may struggle to cover mortgage payments, insurance, and maintenance.
It’s not a guarantee of profit, though. The rule ignores mortgage interest, council tax, void periods, and repair costs. It also assumes you can find a tenant at the asking rent, which isn’t always true in slower markets.
Urban areas with high demand – like London suburbs, Birmingham city centre, or popular student towns – often meet or beat the 1% target. A cheap house in a high‑growth region can still pull in enough rent to hit the mark, especially if you can add value through modest renovations.
In contrast, rural locations or places with low employment rates usually fall short. A £300,000 cottage in a quiet village might only fetch £1,800 a month, well under the 1% guideline. In those cases, you’d need a larger down payment, a lower‑interest mortgage, or a different strategy such as short‑term holiday lets.
Another twist is the “2% rule” that some investors use in very hot markets. If you can charge double the 1% figure, you have a solid buffer for unexpected costs. But chasing the 2% rule can push you into overpaying for a property, which hurts long‑term equity.
Bottom line: use the 1% rule as a quick sanity check, not the final verdict. Combine it with a deeper cash‑flow analysis – factor in your loan terms, tax situation, and the likelihood of vacancies. If the numbers still look good, the property could be a solid addition to your portfolio.
Need a real‑world example? Our post “How Much House Can I Afford on $36,000 a Year?” shows how income and debt shape what you can buy. Pair that with the 1% rule to see whether the homes you can afford also rent out well. And if you’re eyeing shared ownership or co‑ownership deals, remember the rule still applies to the portion you actually own.
So next time you walk through a listing, run the 1% test in your head. If it passes, dig deeper. If it fails, consider whether you can improve the rent, lower the purchase price, or pick a different location. Simple, fast, and surprisingly powerful – that’s the 1% rule in action.
