The 1% rule says a rental should gross monthly rent equal to at least 1% of its purchase price. It's a decent screen. It is not underwriting, and treating it like underwriting will buy you a bad building.
On one of our Deal Analysis calls, a member brought a fourplex that shows exactly how the rule lies. We ran it live, and it's worth walking through, because the failure points are the ones that kill deals everywhere.
The deal on paper
Off-market fourplex in Cincinnati, four 1-bed/1-bath units, 1940s vintage, asking $330K with a suggested offer around $310K. The agent's pitch: potential rent of $995 per unit, or about $4,000 a month.
$4,000 on $330K is over 1.2%. Passes the rule with room to spare. Green light, right?
Step one: verify the rent claim
Current average rents in the building were $725. The $995 was somebody's proforma, and a proforma is a hope with formatting.
Here's the rent comp workflow I use every time:
- Start with a data tool for the neighborhood baseline. I use DoorProfit, which suggested around $650 for comparable units.
- Cross-check on Zillow. Filter to for-rent, apartments, exact bedroom match. The comps came back at $695, $775, $850, and $895. A $925 unit had been sitting 16 days, and a $995 unit had been sitting 62 days. Days on market matters: a stale listing isn't a comp, it's a warning.
- Confirm with a property manager. The only thing that would have saved this deal is a local PM confidently supporting $995. I doubted it, and that's exactly the phone call to make before writing an offer.
Realistic answer: maybe $900 max. That alone knocks the "potential" income down 10%, but it gets worse.
Step two: read the building from the photos
Before you ever tour a small multifamily, listing photos tell you a lot about operating costs:
- Radiators mean a central boiler. One heat source for the whole building, common in the Midwest. Not ideal: one tenant runs hot while another is cold, and the owner pays the heat. This building had it, roughly $5,400 a year in owner-paid utilities.
- Ceiling ducts plus individual thermostats mean independent heat. Tenants pay their own. Baseboards, same story.
- 1940s buildings aren't automatically bad. Watch for lead paint and old electrical, but if the electrical and plumbing are updated and the building is solid, it's not the end of the world.
Step three: run the real numbers
We re-ran the deal at $900 rents, a 6.75% rate, 8% vacancy, Ohio's healthy property taxes, and that $5,400 owner-paid heat bill. The insurance quote of $2,000 a year for a fourplex looked low to me too, which means the real numbers are worse than these.
Result: roughly a 6 cap on proforma, below my 6.25 minimum (my standard underwriting numbers are here), thin-to-no cash flow. My verdict on the call: sadly, even at the 1% rule, this doesn't work. It's a good reminder of why I favor 2-to-4-unit properties that actually pencil, not just ones that pass a screen.
Why the rule fails
The 1% rule only looks at price and gross rent. It cannot see:
- Who pays utilities. A central boiler moves thousands a year from tenants to you.
- Property taxes. The same rent-to-price ratio performs completely differently in a high-tax state.
- Whether the rent number is even real. Agent proformas routinely run 10 to 30% above what comps support (this one claimed $995 against $725 actuals).
- Vacancy, insurance, and the age of major systems.
Use the rule to decide which deals earn 30 minutes of your attention. Then verify rents with three sources, read the systems, and run the full stack. The deeper version of that analysis is in the fast and simple way to analyze multi-family deals. If a deal only works on the listing agent's numbers, it doesn't work.
This article is for educational purposes only and is not tax, legal, or financial advice. Consult a qualified CPA or tax attorney about your specific situation.
