The New (Better) 1% Rule for Real Estate

0:00This is the new 1 % rule for real estate investors. For decades, investors use the 1 % rule to pick markets and properties. If a house's rent was more than 1 % of the purchase price, it would probably cash flow. But today, 1 % rule deals are almost impossible to find in most places. And that rule was created when interest rates and insurance payments and property taxes were much lower. Recently, I've been using a new, different metric, the rent-to-payment ratio. It's rent divided by your full mortgage payment, including principal, interest, taxes, and insurance. And in my own deal analysis, it's been a much more reliable predictor of cash flow in 2026.

0:47So today, I'm going deep on this 1 % rule 2.0, what it does and doesn't reveal about a property. the sweet spot ratio I'd target instead of just chasing the highest number, and the full ranking of the top rent-to-payment markets across the US. This is the new cashflow math you need to know.

1:12What's up, everyone? I'm Dave Meyer, Chief Investment Officer at BiggerPockets. And today, I'm going full data nerd on you guys with a new investing metric, the rent to payment ratio. Now, if you're investing back in the 2010s or even a couple of years ago, you may have heard of a rent to price ratio, or you may have heard of the 1 % rule as a rule of thumb for measuring cashflow. That rule of thumb is exactly what it sounds like. You would compare one month of rent to the purchase price of a property. And if it was at or near 1%, your deal was probably going to cashflow. If it was higher than 1%, you were probably getting a great cash flowing deal.

1:55And it was a really useful metric for a really long time. During the 2010s, when interest rates were lower and taxes were lower and insurance was lower, it worked really well. But it has become a little bit outdated. I personally haven't used rent to price ratios in my own underwriting and analysis for a while because I don't think it actually tells me that much anymore. First and foremost, it's really hard to find 1 % rule deals right now. And it can be really discouraging using a benchmark from a different era when cashflow was easier to find in today's market because you're probably missing good deals and good opportunities using an outdated metric.

2:37The other thing is that sometimes now when you use rent to price ratio, you might find a deal that looks really good by rent to price. But if it's in an area that has super high property taxes or super high insurance, it might not actually cash flow. And you could actually be getting a false positive because of an outdated metric. So instead, I created a new metric. It is a slight variation on a debt service coverage ratio. If you're familiar with that or if you've used a DSCR loan before, this will be very familiar to you. I didn't like make this up out of thin air. But what I did was pull together a bunch of different data sources that don't normally talk to each other to create this new metric.

3:21What it is, is the rent to payment ratio. So instead of comparing rent to the purchase price of a property, what I'm doing is comparing the rent to what you're actually paying to your mortgage company each and every month. This is also known as your debt service. That's why it's similar to a debt service coverage ratio. Your full debt service includes your principal that's paying down your mortgage, interest, that's the profit that goes to the bank, your taxes, super important in this new era of real estate, right, because taxes have gone up a lot, and insurance, also really important in this new era of real estate that has gone up a lot, particularly in some markets that are prone to natural disasters.

4:05By doing this, you're better incorporating the expenses that investors are facing on a day-to-day basis. Instead of just saying that the purchase price of a property is indicative of what your expenses are going to be, this actually measures the majority of your expenses. But it is not a substitute for underwriting your deal. Once you've looked at these deals and thought, okay, this one has at least the benchmark level of cash flow that I am looking for, that's when you go put it in the BiggerPockets calculator, do the full analysis, understand how this deal is going to add to your portfolio, how it's going to move you towards financial freedom over time.

4:47You can't substitute that stuff. You got to do it. But by using this rent to payment ratio, you're going to be able to look through markets and deals so much quicker. So if you want to calculate this for yourself, it's actually quite easy. All you need to know is one month of rent and your total mortgage payment. So if you're looking at a deal, just estimate the rent, estimate what the mortgage payment is going to be, divide the rent by the mortgage payment, and you got it. The higher the number, the better cash flow potential it's going to have. And actually, we'll talk about this in a minute, but 1 % is actually a pretty good benchmark similar to the rent to price ratio for this new metric.

5:26If you are getting a 1 % rent to payment ratio or better, you're going to cash flow. But you do not need to get 1%. I want you to know that. We'll talk about different tiers, but I'll just give you a little bit of a preview. If you're at like 0.7, 0.75 or above, you're probably going to have cash flow potential, you still have to go analyze the deals to figure out what it's going to be. But 1 % is not a hard and fast cutoff rule. But if you're close to 1%, you should feel pretty good about that market or about that deal. So calculating it for yourself on an individual deal, super easy, right? You're just taking two numbers and dividing them.

6:05Calculating it on a market level is just a little bit trickier because you need to know the average taxes and average insurance. I was able to gather the top 54 biggest markets in the country. I figured out all this information for you and I will share that with you in just a minute and you can download it for free on the BiggerPockets website as well. All right, so hopefully this all makes sense and you're bought in on this new rule of thumb. I'm clearly stoked about it. I've been using it and think it works really well. I'm going to show you the market rankings and I'm actually going to just walk you through how to use this with a real deal.

6:41But we do have to take a quick break. We'll be right back.

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9:17Welcome back to the BiggerPockets podcast. I'm Dave Meyer. Today, we are talking about the new 1 % rule for real estate investors. Instead of using the outdated rent to price ratio, we're going to be talking about and using the rent to payment ratio, where you compare one month of rent to your mortgage payment rather than comparing rent to the purchase price of the property. We are going to talk about how to use this when analyzing a deal. It's super easy, but I'm going to show you and walk you through some actual real live deals in just a minute. But first, I want to show you this spreadsheet that ranks some of the top markets in the country by this new ratio that I created.

9:56So what I did was I actually went out and gathered data from a bunch of different sources, but I used Zillow data for home values. I know people get all up in arms about Zestimates and Zestimates on any individual property can vary a lot. I admit that. But actually, when you aggregate Zestimates and look at a whole county or a whole city level, it's pretty accurate. I've looked into this. It is pretty accurate. We're also doing the same thing with rents. So when you aggregate the data, it's pretty accurate. I know if your property Zestimate is off, I've seen that many times or your neighbors is off.

10:32I get it. That definitely does happen. But this data for our purposes here, I do think is reliable. We also, I just found a bunch of different tax sources and aggregated those and insurance costs as well. Keep in mind, these are averages. They are not going to be the same for every single property. But what I found is that there are sort of like 10, I would say, elite level cash flow cities in the country right now. These are cities where the average deal has a rent to payment ratio of 1 % or above. Those cities, if you're in one of these 10 cities, it is going to be much easier for you to find cash flow than any other city.

11:14Now, keep in mind, other cities will cash flow. A lot of these other cities on this list will cash flow, but these ones are going to be the easiest. So those 10 are, I'm going to start with number 10 and I'll just count down. So this is the 10th best is Milwaukee. That's at 0.99. I'm rounding up to 1%. 0.99. Then we have Pittsburgh, Pennsylvania, Baltimore, Maryland, Philadelphia, Pennsylvania, St. Louis, Missouri, Hartford, Connecticut, Birmingham, Alabama, Memphis, Tennessee, Cleveland, Ohio, and Detroit, Michigan. Now, you'll probably notice a pattern here. Eight out of 10 here are in the Midwest, and all 10 of them are relatively inexpensive markets.

11:58Like the most expensive market on this list with the highest median home value is Philadelphia at$248 ,000. That is well below the national average, which is about$440 ,000 right now. But the other markets, like Milwaukee's at$195 ,000, Pittsburgh's at$198 ,000. Cleveland 135 and Detroit really stands alone at$72 ,000. So if you're in any of these markets cash flow is going to be easier to find than any other markets in the country. Now you still have to go out and find the right deals but if you are an investor wondering where to invest this is such a good way to create a short list. You shouldn't use this to pick the whole market.

12:43But if you say cashflow is a priority to me, you know, the first 10 or 20 on this list is where I would start my further research. And we've talked a lot on this show about how to do more research into a market because you can't just use cashflow. You need to figure out, are there good economic prospects? What are the appreciation is going to be? What's happening with population? Like you still have to do all of that. But if I were a cashflow focused investor, I'd take the first 10 or 15 here and then figure out which of them has the best blend of other metrics that are in line with my long-term strategy.

13:19So for me, I'm not a pure cash flow investor. So what I would be looking for is like, what's a good hybrid market? I want a market that is going to appreciate and I'm willing to sacrifice cash flow for some of that appreciation. So when I'm just eyeballing this list, I would say places like Hartford, Connecticut stand out to me. Philadelphia is a good market. Indianapolis, Columbus, Ohio, those are still below 1 % during the top 15 or so, but still really good markets with strong fundamentals, exciting things happening, and do offer good cash flow. Now, if you're looking at this on YouTube, you'll see that I've ranked the markets green, yellow, red.

14:01And if you're listening on audio, I'll just let you know. The top 10, the ones I named to you, those are green. Those are kind of like the elite level cash flow markets. Then I brought in another 19 markets are in yellow. And those are going to be solid cash flow markets. You could probably still find cash flow in any of these markets, with the exception of New York. New York just has some unique idiosyncrasies here where it's on this list, but I don't think you could probably find cash flow there. But all the other ones here, maybe not Minneapolis, but a lot of them you will be able to find cash flow on these deals.

14:37Because two things here. First and foremost, 1 % rule is not dogma. It is not the be-all, end-all. It is just telling you how likely it is you are to find cash flow. The second thing to remember here is these are averages. So if you're looking at a city like Buffalo, New York, I'm just picking one random, it has a rent to payment ratio of 0.89. That means that's the average of all of the deals. So as an investor, you better not be looking for average deals, right? If it's at 0.89, that means by rule, just the math, half of the deals in that market are better than 0.89, right? And so your job as the investor is to go out and find that deal that is better than 0.89.

15:27That is a really good way to use this metric. Even if you're in some of these lower markets, like I think Dallas is a great example. It's actually in my third tier by rent to payment ratio at 0.74. It's not terrible. That's still pretty good. But Dallas is a great market. So can you go out and find a deal in Dallas at 0.9? I bet you can because half the deals in that city are going to be above 0.74. And so just knowing that 0.74 is the average and that average is kind of low, your goal should be to say, hey, how much can I beat that average by? How can I beat 0.74 by? And you can do this in almost every market.

16:13Now, I'm not going to say every market cash flows. Like when you get down to the bottom of this list, San Jose, California, Austin, Texas, Los Angeles, Seattle, San Francisco, like these markets are probably not going to cash flow. They just aren't. It's really, really challenging. Now, I want to just call out a couple of things here. Like as we're looking at the bottom here, there are some markets here that used to be great cash flow markets. Like I'm looking at Houston here that, you know, for a long time had a good cash flow rate or Oklahoma City, for example, which had pretty strong cash flow.

16:46I want to just show you in Oklahoma City where the average rent is$1 ,130, the average insurance per month is$814, right? So this is why the rent to payment ratio is important is because if you're just comparing the rent to the home value in Oklahoma City, you're missing the most important variable here for investors, which is that your insurance is going to take up about 75 % of your monthly rent, just the insurance. You see similar things in Denver, right? Denver has super high insurance. Houston has really high insurance. Houston has the double whammy of high insurance and high taxes. If you put the average taxes and insurance for Houston together, it's$1 ,100.

17:36Meanwhile, while your rent is under$1 ,700. So just looking at this in Houston, on average, you can see your monthly payment is significantly more than your rent. Like there's no way you're going to get cash flow unless you get a screaming deal. And obviously, I should have said this earlier, but these are for on-market deals. So like they're as is. So if you're doing a heavy renovation and of BRRRR, you can reconsider this, right? The way you would do that is by evaluating the future rent that you're going to get once you renovate the property by your future payment, once you refinance. That's how I would look at it.

18:16Future rent, future payment. Calculate your rent to payment ratio that way. One other thing I want to call out is on the total opposite end of the spectrum, these markets, Detroit, which really stands alone in terms of its rent to payment ratio, it's at two. That's really high. The average payment in Detroit right now is six hundred and forty two dollars, where the average rent is nearly thirteen hundred dollars. That's amazing. Right. So if you're looking for pure cash flow, Detroit stands alone. But Detroit, similar to Cleveland and to Memphis and Birmingham, sort of certain these first four markets, at least there are tradeoffs in these markets.

18:55They may not appreciate in the same way that other markets do. Now, a lot of them have been growing in recent years. But, you know, in this new great stall era, I do personally expect a reversion to the mean for a lot of these high flying cities. That doesn't mean they're necessarily going to turn negative, although some of them could turn modestly negative. It's just important that you understand the fundamentals. Detroit is recovering as a city. But as an example, its population has really declined since the financial crisis. And so there is an oversupply of homes. There might be high vacancy rates.

19:31This is why you can't just take this metric and use it to evaluate everything. If you really want cash flow, look at Detroit. But make sure you're buying in a good pocket of Detroit where there's going to be strong rental demand and home values are going to go up. You can do that. That absolutely exists in Detroit. I've been looking at deals there. Like that definitely works. That works in Cleveland. But don't just assume because it's the highest rent to payment ratio that it's like automatically a good buy. So that's how you use this at a market level. Again, you use it by comparing to one another the relative availability of cash flow.

20:07And then two, once you pick market, knowing what the average is and then using that to set a baseline for what your deals are going to be, they're going to have to beat that level. That's how you use it at a market level. But it's also really valuable at a property level. And to show you how to do that, I'm just gonna actually pull up a listing. But before we do that, we have to take one more quick break. We'll be right back.

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24:30Welcome back to the BiggerPockets podcast. I'm Dave Meyer, today talking about a new rule of thumb that I think everyone should be using, the rent to payment ratio. Before the break, we talked about how to calculate this and how to use it at a market level, but I'm just gonna show you how to use it at a property level. And to do that, I am gonna look for a property in Memphis. I just used my list and instead of using Detroit because it's kind of an outlier, I just picked another one of the high up markets that have a strong rent to payment ratio. And I'm gonna just pick the first one here on our list on Zillow.