The 7% rule in real estate is a simple guideline that investors use to quickly estimate whether a rental property might be a good deal. Here’s how it works in plain, conversational terms:
- The rule says that the monthly rent you can charge for a property should be about 7% of the property’s purchase price (sometimes people use 0.7% instead of 7%, depending on context).
- For example, if a house costs $200,000, the 7% rule suggests you could charge around $1,400 per month in rent ($200,000 × 0.007 = $1,400).
- If the property can generate at least this rent, it’s considered a potentially good investment.
💡 Why it matters:
- It’s just a quick, rough check to see if a property might cash flow well.
- It doesn’t replace a full financial analysis—you still need to account for mortgage, taxes, insurance, maintenance, and vacancy rates.
Think of it as a fast “sniff test”: if the rent isn’t close to 7% of the price, the property might not make sense as an investment.
1. The 1% Rule
- This is the most common rule for rental investors.
- It says your monthly rent should be at least 1% of the property’s purchase price.
- Example: If a house costs $200,000, you’d want to charge $2,000/month in rent.
- If the rent is less than 1%, the property might not cash flow well after expenses.
2. The 7% Rule
- This is similar to the 1% rule but a bit higher—sometimes people use it for short-term rentals or very high-demand areas.
- Basically, the monthly rent should be around 7% of the purchase price.
- Example: A $200,000 house should bring in about $1,400/month ($200,000 × 0.007).
- Think of it as a quick check to see if the property can generate strong rent relative to its price.
3. The 50% Rule
- This one is about expenses, not rent.
- It says that roughly 50% of your rental income will go to operating costs like taxes, insurance, repairs, and management fees.
- Example: If your rent is $2,000/month, expect about $1,000 to cover expenses (not including your mortgage).
- This helps you quickly estimate cash flow: rent minus expenses minus mortgage = your profit.
✅ How investors use these together:
- Check if rent meets the 1% or 7% rule.
- Estimate expenses using the 50% rule.
- This gives a fast snapshot of whether a property could be profitable before doing a full analysis.