Summary of The New (Better) 1% Rule for Real Estate

Overview of The New (Better) 1% Rule for Real Estate

In this BiggerPockets episode, Dave Meyer argues that the classic 1% rule for rental properties is becoming less useful in today’s market and introduces a better metric: the rent-to-payment ratio. Instead of comparing monthly rent to purchase price, he recommends comparing rent to the property’s full monthly mortgage payment — principal, interest, taxes, and insurance (PITI). This newer benchmark is designed to reflect modern investor realities, especially higher taxes, insurance, and interest rates, and it can help investors screen deals and markets more accurately for cash flow potential.

Why the Old 1% Rule Is Less Reliable

What the old rule measured

• Traditional 1% rule: monthly rent should be about 1% of purchase price
• Example: $2,000 rent on a $200,000 house

Why it worked before

• In the 2010s and earlier, lower:
  • interest rates
  • property taxes
  • insurance costs
• That meant purchase price was a decent shorthand for total carrying costs

Why it breaks down now

• Today, a property can look great by price-to-rent and still fail to cash flow because:
  • taxes are much higher in some markets
  • insurance costs have risen sharply
  • mortgage rates are much higher
• Result: the old rule can create false positives and cause investors to miss good deals or overestimate cash flow

The New Metric: Rent-to-Payment Ratio

Definition

The rent-to-payment ratio is:

Monthly rent ÷ total monthly mortgage payment (PITI)

Why it’s better

• It measures the real monthly burden more accurately
• It better reflects what investors actually pay each month
• It’s similar in spirit to debt service coverage ratio (DSCR)

What’s included

• Principal
• Interest
• Property taxes
• Insurance

How to use it

• For a quick deal check:
  1. Estimate monthly rent
  2. Estimate monthly PITI
  3. Divide rent by payment
• Higher ratio = better cash flow potential
• Dave suggests 1.0x or better is a strong benchmark
• In practice, a range around 0.8 to 1.1+ can be useful depending on strategy and value-add potential

Top Cash Flow Markets by Rent-to-Payment Ratio

Dave ranked the largest U.S. markets using Zillow home values, rental data, taxes, and insurance estimates. The top 10 “elite” cash flow markets were:

Key pattern

• 8 of the top 10 are in the Midwest
• These are generally lower-priced markets, which helps cash flow
• Detroit stands out as the strongest cash flow market, with average rent far above average monthly payment

Important caveat

• These are market averages, not guarantees on individual deals
• A market with a low average ratio can still produce great deals if you beat the average

How to Interpret the Market Rankings

Green tier

• The top 10 markets
• Best places to start if cash flow is the priority
• Easier to find deals that meet or exceed the benchmark

Yellow tier

• Next 19 markets
• Still solid cash flow potential
• Worth deeper analysis, especially if you want a hybrid of cash flow and appreciation

Red/bottom tier

Markets like:

• San Jose
• Austin
• Los Angeles
• Seattle
• San Francisco

These are generally not good cash flow markets on average, especially for on-market rentals.

Why Some Former Cash Flow Markets No Longer Work

Dave highlights that some once-strong cash flow markets have been damaged by rising insurance and taxes.

Examples

• Oklahoma City: insurance can consume a huge share of monthly rent
• Houston: high taxes + high insurance create a major drag
• Denver: insurance costs are a problem

This is a big reason why rent-to-payment is more useful than rent-to-price today.

How to Use the Ratio on a Specific Property

Dave walks through a Memphis duplex example to show how the metric works in practice.

Deal 1

• Asking price: $340,000
• Two units with listed rents: $1,255 + $1,385 = $2,640/month
• Estimated monthly payment: $2,625
• Rent-to-payment ratio: 1.01

Takeaway

• This is basically a 1% rule deal
• Likely to cash flow
• But it may not be the best deal in that market because Memphis averages even higher

Deal 2

• Cheaper duplex: about $300,000
• Estimated rent: $2,500/month
• Estimated payment: $2,192
• Ratio: 1.14

After negotiating price down

• Purchase at $280,000
• Payment drops to about $2,076
• Ratio improves to 1.2

Takeaway

• Better cash flow potential than Deal 1
• Also more value-add upside through cosmetic rehab
• Shows how this ratio helps prioritize which deals deserve deeper analysis

Best Practices and Warnings

Use it as a filter, not a final decision tool

Dave emphasizes that this metric is:

• a rule of thumb
• a screening tool
• not a replacement for full underwriting

You still need to analyze:

• appreciation potential
• neighborhood quality
• vacancy risk
• rental demand
• portfolio fit
• long-term financial goals

Beware of overly high ratios

A very high rent-to-payment ratio can sometimes be a red flag, not just a great opportunity. It may signal:

• bad pricing
• distressed property conditions
• weak demand
• neighborhood problems
• unusual market inefficiencies

BRRRR / rehab strategy adjustment

For value-add investors:

• use future rent
• use future payment after refinance
• calculate the ratio based on the completed deal, not just current numbers

Main Takeaways

• The classic 1% rule is outdated in many markets
• The new rent-to-payment ratio is more accurate because it includes:
  • principal
  • interest
  • taxes
  • insurance
• 1.0x or better is a strong benchmark
• Detroit, Cleveland, Memphis, Birmingham and similar markets stand out for cash flow
• Use the metric to:
  • compare markets
  • screen deals quickly
  • prioritize your time
• It should supplement, not replace, full deal analysis

Action Items for Investors

• Calculate rent-to-payment ratio on every deal you review
• Build a shortlist of markets with stronger average ratios
• Compare actual deals against the market average
• Use the BiggerPockets calculator for full underwriting
• For BRRRR deals, evaluate future rent vs. future payment
• Focus on deals that beat both the market average and your investing goals

Bottom Line

Dave’s message is simple: in today’s real estate environment, cash flow is better measured against actual monthly debt service than purchase price. The rent-to-payment ratio gives investors a faster, more realistic way to spot strong deals and identify the markets where cash flow is still alive — while still reminding them that smart investing requires deeper due diligence.