BiggerPockets Real Estate Podcast - The New (Better) 1% Rule for Real Estate
Episode Date: September 2, 2026The rules of real estate investing have changed. For years, investors were using the one-percent rule to quickly determine if a real estate deal would cash flow. But the one-percent rule, rent-to-p...rice ratio, and other common rules of thumb have a glaring blind spot. They account for purchase price, but they don’t account for expenses. Meanwhile, mortgage rates, taxes, and insurance have all risen across the board—expenses that can easily kill your cash flow. So, Dave’s come up with a new rule of thumb you can use to quickly analyze rental properties and markets. He’s calling it the rent-to-payment ratio. By comparing estimated rents to the estimated PITI payment itself, you’ll have a much better idea of whether a rental property will actually cash flow month to month. And today, we’re not just breaking down how the formula works. Dave also built an entire spreadsheet that ranks U.S. real estate markets by their rent-to-payment ratios. Whether you’re looking for the best cash flow markets to invest in or a quick way to weed out unprofitable properties, this is the kind of math you need to make sharper investing decisions in 2026. In This Episode We Cover The “new” rule of thumb for finding great real estate deals and rental markets Why rent-to-price ratio is a flawed metric (and which ratio to use instead) Why the popular one-percent rule no longer works in 2026 The top 10 real estate markets with the highest rent-to-payment ratios How to bake today’s mortgage rates, taxes, and insurance into your initial analysis And So Much More! Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1325. Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email advertise@biggerpockets.com. Learn more about your ad choices. Visit megaphone.fm/adchoices
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This 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 26. So 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 U.S.
This is the new cash flow math you need to know.
What's up, everyone?
I'm Dave Meyer, chief investment officer at Bigger Pockets.
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 cash flow.
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 cash flow.
If it was higher than 1%, you were probably getting a great cash flowing deal.
And 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 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 cash flow was easier to find in today's market,
because you're probably missing good deals and good opportunities using an outdated metric.
The 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 pulled together a bunch of different data sources that don't normally talk to each other
to create this new metric. What 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. By 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 bigger pockets 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. You can't substitute that stuff. You can't substitute that stuff.
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.
If 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.
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. Calculating 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 Bigger Pockets 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, but we do have to take a quick break.
We'll be right back.
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Welcome back to the Bigger Pockets 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.
So what I did was I actually went.
out and gathered data from a bunch of different sources, but I used Zillah 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's estimate is off, I've seen that many times or your neighbors is off.
I 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. Now, 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 rounded 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 really.
relatively inexpensive markets. Like 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 right now. But the other markets, like Milwaukee's at 195, Pittsburgh's at 198, 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.
But if you say cash flow 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 the show about how to do more research into a market because
you can't just use cash flow. 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 cash flow 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. So 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 all.
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. And 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. Because 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 0.8.8.5.5.5.5.5
right? And so your job as the investor is to go out and find that deal that is better than 0.89.
That 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 point nine, I bet you can because half the deals in that city are going to be above
point seven four. And so just knowing that point seven four 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 how much
can I beat point seven four by? And you can do this in almost every market. Now I'm not going to
say every market cash flows like when you get down to the bottom of this list, Sanho's,
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.
I 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 $75,000.
percent 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. Meanwhile, 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 a burr, 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.
Future 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 $642, where the average rent is nearly $1,300. 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 to Birmingham, so these first four markets at least, there are tradeoffs in these markets.
They 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
high vacancy rates. This 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.
And 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 going to 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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Welcome back to the Bigger Pockets 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 going to show you how to use it at a property level.
And to do that, I am going to look for a property in Memphis. I just use it.
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 going to just pick the first
one here on our list on Zillow. I'm just going through Zillow. I just searched for multifamily here.
And we found a property on Harvard Avenue. It is listed at $340,000. It's a six-bed two-bath built in
1927, a little bit older, but it is 3,200 square feet. It actually looks nice. The bricks,
you know, had some tuck pointing, so there's some work done there. The roof is in pretty good
shit, but it's got some charm. It's a nice house. Seems like it's in a decent neighborhood,
for sure. What I would do if I were looking at this deal is first and foremost, I always look at
the pictures just to see, like, is this place reasonable? And I actually like what I'm seeing here.
We got hardwood floors. We have fresh paint. The kitchen definitely needs.
an updating, which I like personally.
I think that's great.
That's a sign of a cosmetic rehab opportunity.
Yard needs a little bit of work, but it's not bad.
There's a nice fence.
Like, it's a good property.
So what I would do in this scenario is just quickly calculate the rent-to-payment ratio.
And lucky for us, if we look at this duplex, they have listed the actual leases.
So we don't even need to estimate the rent here.
What we know here is that our rent is going to be 1255 for the lower and 1385 for the upper unit.
And what we get there is 2640.
So this property is pulling in 2640.
So already in my head, I'm asking myself, is my monthly payment on this mortgage going to be more or less than 2640?
Let's find out.
To do that, I'm just going to pull up the bigger pockets mortgage calculator.
and figure out what our payment is going to be.
So I'm going to just assume that we're paying full price for this.
So my loan amount, if I'm putting out 25% as an investor,
is going to be $255,000.
I'm going to do a 30-year fixed.
Interest rate's probably around seven right now.
Our annual taxes, they're pretty high, are $9,800.
And on the listing, the insurance is estimated at $1,350 a year.
So I'm going to just hit calculate my monthly mortgage payment.
And what we got here is 2625.
So this is darn close to a 1% rule deal.
Pretty good, right?
Because what we found is that our monthly payment is 2625.
Our monthly rent is 2640.
And if you do 2640 divided by 2625, it's basically 1.01%.
So we got a 1% rule here in Memphis.
But remember in Memphis, our average deal was going to be 1.17.
And so while this deal probably will cash flow, it is probably not the best cash flow
we can find in Memphis because we know that on average, the ratio is a bit higher.
Now, I'm not saying that you shouldn't buy this deal because when I look at this deal,
I'm like, can I fix this thing up, put 20 grand into it, and bring our rents from 2640 up to
2,800 or 2,900, if so, might be worth buying this deal. But if I'm looking for a turnkey
kind of investment where I just put tenants in, because this place is nice enough, you could just
put tenants in. Like, this probably isn't the best pure cash flow opportunity. So the way I would
look at this and use this ratio is instead I would look for another deal. So let's just see if we
can find another one. Let's look at this duplex instead. This is a six-bed three-bath. It's cheaper.
So it's about $300,000. The kitchens are a little bit older, but it's still in decent shape.
Like you could definitely rent this out today. Like the kitchens, I would put a little bit of money
on if it would mean, but you could rent this right now. Now, these are big units. They're three-bed,
too bad. And so I'm going to assume that I can get $2,500 in rent for this. And so we're taking out a
smaller loan at $2.25. And then our annual taxes are going to be cheaper at around $7,000. Our
insurance, I'm just going to assume, is going to be the same. And now we're getting $2,000.
So this is a better cash flowing deal. So $2,500 divided by $2,000, what do we got? Now we have $1.1.1.2. Now we have
1.14. This is closer to the average for the area. So this is a deal I would consider personally.
I think this is a better cash flowing opportunity. I think there's a better upside on this deal
personally for a cosmetic rehab because if you just look at it, like we could maybe drive the
rents up to 2,800 on this by fixing it up. It's a nice property, but just need some work inside.
And the other thing I like about this is this one's been sitting on Zillow for 55 days. So I'm
probably going to get this below what they're asking at 295, right? Let's just assume we get a
little bit of a discount. We get it at 280. If we do that and update our payment, now we're at 2076.
If we divide 2,500 by 2076, now we're at a 1.2. So even if you don't do the renovation,
if you just buy this at a little bit of a discount, 15 grand off, that's after sitting for 55 days,
You buy this thing at a discount.
Now you're getting a 1.2.
Now that's above the average.
Now you'd go do the renovation.
That's a really good opportunity.
So, of course, I would have to do more due diligence
and do a full analysis on the bigger pockets calculators
to understand if this is the kind of deal that I want to buy.
But just in those five minutes, I just showed you,
that first deal I thought was going to be good.
I looked at it.
I was like, this is going to be a good deal.
And it was, it probably would cash flow.
But two minutes later, I found another deal that has better cash flow opportunity.
Still going to do analysis on the second one, but it allows me to say, I'm better off spending
my time digging into that second deal than I am the first one.
That's what rules of thumb are for.
They're not the absolute be-all, end-all of any analysis.
They're used to help you save time and to eliminate deals that are clearly not going to work
and to spend your time on the deals that have a high potential of penciling out.
So go out and do this for yourself.
Like, hopefully you can see how useful this is.
We will put a link to the spreadsheet for the markets below.
And then go out and calculate this on deals, on Zillow, Redfin, Realtor, whatever you use.
Go check out some deals and see if it works.
Go see where the best rent-to-payment ratios are in your market
or compare between two different markets and see which one.
have a better cash flow perspective.
Once you've done that, go really work hard to estimate your rents, estimate your expenses.
Put all of that into the BiggerPockets calculator.
You just go to Biggerpockets.com slash calculator.
Go calculate the deal, see what the cash on cash return is going to be, what your
annualized return over time is going to be.
You still got to make great offers.
You've got to do the work.
But this rule of thumb, I think, will help you streamline your deal flow and your analysis
so much. It's been helping me a lot and hopefully this completely free tool that you can use
can help you find your next deal as well. Before we go though, I do just want to reiterate,
although higher rent to payment ratio does indicate better cash flow potential,
the higher the number does not mean that is a better deal. You heard me just talking through
those two deals. Some deals are going to have a better opportunity for value at it. They're going to be
in a better neighborhood. They're going to have better demand. They're going to have better
demand. So you need to think about that. And I actually think oftentimes if the rent to payment
ratio is too high, that's actually a red flag because there's something wrong with that property.
If it is priced really inefficiently, sometimes it happens where some people just price properties
poorly. I've been the beneficiary of that several times in my career. It sometimes happens.
But it's a red flag too. It's something you need to investigate. I think in this kind of market,
if you can find a deal that's in the like 0.8 to 1.1 ratio,
that's probably going to be pretty good.
That's after you do a renovation.
So the deal you might buy might not pencil.
But if you're going to do a cosmetic rehab
or you're going to do a rehab and drive up the rents,
if you can get in that 0.8 to 1.1,
you're probably going to find a good deal.
Again, it's a rule of thumb.
It's not going to work for every single time.
This is just a means of filtering deals.
And I'd love to hear how it works for you.
Like I said, it's been working for me, but let me know in the comments if this new ratio,
this new rule of thumb, this new 1% rule is something you're going to be using in your own investing.
I would love to hear how you're using it.
Share it with the Bigger Pockets community.
That's our episode for today.
Thank you so much for watching this episode of the Bigger Pockets podcast.
We'll see you next time.