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Deal Analysis

Rent-to-Price Ratios: The 1%, 2% & 50% Rules

Worksheet · Author: Austin Coon

Screening rules exist to save you time. The 1% rule, its aggressive cousin the 2% rule, and the expense-side 50% rule are triage tools: each one kills weak deals in minutes so your real underwriting time goes to the survivors.

Used properly they rank deals within a market. Used improperly — as pass/fail verdicts — they reject nearly everything in Indianapolis, where most single-family homes trade at 0.6–0.9% rent-to-price.

The three rules, in one family

  • The 1% rule: monthly rent should equal at least 1% of the purchase price — a $150,000 house renting for $1,500. The baseline screen for balanced income potential.
  • The 2% rule: rent equal to 2% of price. Built for low-cost markets, and realistically impossible above roughly $250,000 — a $350,000 property would need $7,000 a month. When you see 2% today, look carefully at the neighborhood: it usually signals high turnover or repair risk.
  • The 50% rule: operating expenses — including capital items — tend to eat about half of gross rent over time, before the mortgage. The fastest sanity check in rental analysis.

A better screen: the ratio plus honest carry

The 1% rule’s blind spot is everything it ignores: taxes, insurance, HOA, condition, and your interest rate. The fix is to layer real carrying costs on top of the ratio — county taxes, insurance, a 5% vacancy allowance, a maintenance reserve, and actual financing. The ratio gets you to the table; the cash flow line tells you whether to sit down.

How to triage 20 listings in 30 minutes

  • Pull three data points per listing: price, estimated rent, and the parcel’s actual taxes from the county auditor.
  • Run every listing through the same screen with the same financing assumptions — comparisons only work with identical math.
  • Sort by cash flow, not ratio. Take the top three into a full underwrite.

Common questions

What ratio should I target in Indianapolis?

0.8% or better with positive cash flow after honest expenses is a reasonable bar for a full underwrite. In appreciation areas like Carmel and Fishers, lower ratios can make sense when your thesis is growth rather than monthly income.

Is the 50% rule reliable?

As a screen, yes; as an underwrite, no. Real expense ratios run from about 35% on newer construction to 60%+ on older homes with owner-paid utilities. Use it to catch wild underestimates, then do the real math.

Where do I go after the screen?

Graduate promising deals to the Rental Underwriting Model for cash-on-cash and cap rate, and the Simple Pro Forma calculator on this site for the quick version.

Want to run this with Austin?

Bring your address, your numbers, or just your questions — Austin works through them with you before you\u2019re committed.