The 1% Rule and Beyond: Calculating Rental Property Cash Flow

What Is the 1% Rule?

• Definition: Rent should equal 1% of purchase price.

• Example: $200,000 property → $2,000/month rent.

• Purpose: Quick screening tool for rental properties.

Why the 1% Rule Isn’t Enough

• Doesn’t account for property taxes, insurance, repairs

• Market-specific differences (Columbus vs. OKC cap rates)

• Fails to factor financing costs and vacancy rates

Beyond the 1% Rule: Advanced Cash Flow Analysis

Cap Rate (Capitalization Rate)

• Formula: Net Operating Income ÷ Purchase Price

• Benchmark: 6–10% for strong rental markets

Cash-on-Cash Return

• Formula: Annual Cash Flow ÷ Total Cash Invested

• Focus: Measures investor return based on actual money put in

Debt Service Coverage Ratio (DSCR)

• Formula: NOI ÷ Debt Payments

• Benchmark: Lenders prefer 1.2+ DSCR

Total Return on Investment

• Includes appreciation, loan paydown, and tax benefits

Step-by-Step Example: Columbus vs. OKC

• OKC Duplex Example:

  • Price: $180,000

  • Rent: $1,900/month

  • Cap Rate: ~8%

• Columbus Triplex Example:

  • Price: $300,000

  • Rent: $3,100/month

  • Cap Rate: ~7%

Common Mistakes Investors Make

• Overestimating rents

• Forgetting maintenance reserves

• Ignoring property management costs

• Using only the 1% rule without deeper analysis

FAQ

Question	Answer
Is the 1% rule still realistic in 2025?	In lower-cost markets like OKC, yes. In Columbus, many deals fall in the 0.7–0.9% range.
What’s a good cash-on-cash return?	Generally 8–12% is considered strong for rentals.
How much should I budget for repairs?	A safe estimate is 5–10% of rental income annually.
Should I always use leverage?	Leverage boosts returns but increases risk. Many investors balance by diversifying.
Which metric matters most?	A mix—1% rule for screening, cap rate for income potential, and cash-on-cash for actual returns.