Looking at a house and wondering if it will make you money? You don’t need a finance degree to get a quick answer. Most investors start with a single rule of thumb that screens out bad deals in seconds. Below is the go‑to guideline, how it works, and why you should still dig deeper.
The 1% rule says the monthly rent you can charge should be at least 1% of the property’s purchase price. In other words, a £200,000 house should bring in £2,000 a month in rent. If the numbers line up, the cash flow looks promising; if not, the property might need a closer look.
Why does this work? It bundles together three big cost drivers – mortgage payments, taxes, and maintenance – into one quick check. When the rent hits the 1% mark, the rent usually covers most of those expenses and leaves room for profit.
Let’s try an example. You find a two‑bedroom flat for £150,000. 1% of that is £1,500 per month. If the local market can support that rent, you’ve got a green light to run the numbers in detail. If the highest you can charge is £1,100, the rule tells you to walk away or look for ways to lower costs.
The 1% rule is a fast filter, not a final verdict. Real life throws in things like service charges, insurance, void periods, and landlord fees. A solid analysis adds these line items to the monthly outgo.
Start with the mortgage payment. Use a mortgage calculator to see what a 25‑year loan at current rates would cost on a 75% loan‑to‑value basis. Then add council tax, utility estimates (if you cover them), and a 10% buffer for repairs. Subtract all of that from the projected rent – the remainder is your net cash flow.
Another tweak is the 2% rule for high‑cost markets such as London. In pricier cities, the rent‑to‑price ratio often drops to 0.8%–1.2%, so investors adjust expectations. The key is to know your local market and compare the rule’s outcome with actual listings.
Finally, look at the long‑term upside. Even if the cash flow is thin, a property that appreciates fast can still be a winner. Check recent sale prices in the area, upcoming infrastructure projects, and employment trends. Those factors can turn a modest rent into a solid return over five or ten years.
Bottom line: start with the 1% rule to weed out the obvious mismatches, then run a detailed cash‑flow sheet that includes mortgage, taxes, insurance, and a repair reserve. If the numbers stay positive and the location shows growth signs, you’ve got a solid investment property.
Ready to apply the rule? Grab a few listings, calculate the 1% rent, and see how many pass the quick test. From there, dive into the deeper numbers – that’s where the real money decisions happen.
