● Money & small business
The 1% rule vs real cash flow: one $250,000 rental at three mortgage rates
✓ TestedWorked example · same model as the tested rental tracker2026-09-26
The 1% rule says a rental is worth a closer look if the monthly rent is at least 1% of the purchase price. It's a quick screen. It ignores your mortgage rate and your real expenses, which is where cash flow is decided.
The property
$250,000 purchase, $2,500/month rent (exactly 1%), 20% down ($50,000) plus $7,500 closing costs, a 30-year loan, and operating expenses at 40% of rent: property tax, insurance, repairs, vacancy and management together. That's $12,000 a year, so NOI is $18,000.
| Mortgage rate | Monthly P&I | NOI | Cash flow / year | Cap rate | Cash-on-cash |
|---|---|---|---|---|---|
| 5.5% | $1,135.58 | $18,000.00 | $4,373.04 | 7.2% | 7.6% |
| 6.5% | $1,264.14 | $18,000.00 | $2,830.32 | 7.2% | 4.9% |
| 7.5% | $1,398.43 | $18,000.00 | $1,218.84 | 7.2% | 2.1% |
What the rule misses
- The rate. The same property's cash flow drops from $4,373.04 to $1,218.84 a year between 5.5% and 7.5%. The cap rate (7.2%) doesn't change, because it ignores financing.
- Expenses. At 7.5%, if expenses are half the rent instead of 40% (an older building, high taxes, a management fee), NOI falls to $15,000.00 and cash flow becomes -$1,781.16 a year. It passes the 1% rule and still loses money.
Use the rule to decide what to look at, then run the real numbers: rate, taxes, insurance, a vacancy allowance and management. The rental property calculator does this for one property; the full walkthrough is in cap rate vs cash-on-cash.