Investors
What is the 1 percent rule and cap rate?
By Steve Lockhart
The short answer
The 1 percent rule says a rental is worth a closer look when the monthly rent equals about 1 percent of the price. A $300,000 property that rents for $3,000 a month clears the screen; one that rents for $1,800 does not.
Full answer
The 1 percent rule says a rental is worth a closer look when the monthly rent equals about 1 percent of the price. A $300,000 property that rents for $3,000 a month clears the screen; one that rents for $1,800 does not. It is a useful filter because it forces you to notice when a price and a rent do not line up, but it is a shortcut, not a conclusion. Financing costs, taxes, insurance, and HOA dues vary too much for one ratio to decide a deal.
Cap rate is the more serious measure. You take net operating income, the rent left after operating expenses but before the mortgage, and divide it by the property value. A property that produces $24,000 a year in net operating income and is valued at $400,000 has a 6 percent cap rate. Because cap rate ignores the loan, it lets you compare a cash deal to a financed deal, and one property to another, on the income the property itself generates.
Neither number should buy a property by itself. A high cap rate can hide a tired building and real repair risk; a low cap rate can be worth it in a location with durable demand. Use the 1 percent rule to screen and the cap rate to compare, then run the full cash flow with your actual financing before you commit.
A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.
Go a little deeper
Frequently asked
Questions investors often follow up on
Is the 1 percent rule a guarantee of cash flow?
No. It is a screening tool only. A property can clear the 1 percent screen and still lose money after taxes, insurance, management, vacancy, and repairs in a specific market. It simply flags deals worth analyzing further.
What is a good cap rate in Las Vegas?
There is no fixed good number, because cap rates move with interest rates, property type, and neighborhood risk. The right comparison is against other Las Vegas properties in the same category and against what your own financing and goals require.
Does cap rate include the mortgage?
No, and that is the point. Cap rate measures the property's income before financing, so you can compare a paid-off property to a financed one and see the impact of the loan separately.
The Lockhart Method
The Lockhart Method
Your Home | My Strategy | Proven Results
My strategy: use the 1 percent rule to screen out the noise, cap rate to compare properties honestly, and a full cash flow model with your real financing to make the call. The shortcut narrows the list; the analysis makes the decision.
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