The 1% rule, and what it leaves out
If you've spent any time reading about rental investing, you've met the 1% rule: a property is worth a closer look if its monthly rent is at least 1% of what you'd pay for it. A $180,000 house should rent for $1,800 a month. Simple, fast, and easy to run from a listing on your phone.
We like it for exactly that reason — it's a screen. It's also where a lot of first-time owners stop, and that's the problem.
Why it still gets used around here
In a lot of the country the 1% rule is a fantasy; prices ran away from rents years ago. The Indianapolis metro is one of the places where it's still within reach on the right house in the right neighborhood. That's a genuine advantage of investing here. It's also why the rule gets treated as a finish line instead of a starting line.
What the rule leaves out
The 1% rule compares price to gross rent. Everything that comes out of the rent before it reaches you is invisible to it:
- Property taxes. Indiana caps taxes on a rental at 2% of assessed value — double the 1% cap on a home you live in. On a $180,000 house that can be several thousand dollars a year.
- Insurance. A landlord policy, not a homeowner's policy, and priced accordingly.
- Maintenance. A typical single-family rental runs somewhere around $1,800 a year in routine upkeep, before anything big breaks.
- Vacancy. Every home sits empty sometimes. Budgeting nothing for it is the most common mistake we see.
- Management. Ours is 10% of gross rent. Others charge 8–12% plus the fees around the fee — setup, inspections, maintenance markups.
- Big-ticket items. A roof, a furnace, a water heater. They're not "maintenance," and they're not optional.
A worked example
Take that $180,000 house renting for $1,800 — a clean 1%. Round, illustrative numbers, not a quote:
- Property taxes: about $300 a month
- Insurance: about $100 a month
- Maintenance reserve: about $150 a month
- Vacancy allowance (5%): about $90 a month
- Management (10%): $180 a month
That's roughly $820 a month before you set aside anything for the roof. What reaches you is closer to $980 a month, or about $11,800 a year — around 6.5% on the purchase price before financing. Still a reasonable rental. But it's not the 12% gross yield the 1% rule seemed to promise, and if you're carrying a mortgage, the margin for surprises is thinner than it looks from the listing.
How to use the rule well
Use 1% to decide what's worth an afternoon. Then do the real math: actual taxes for that parcel, a real insurance quote, a maintenance reserve, a vacancy allowance, and the full fee schedule of whoever will manage it — in writing. A house that clears 1% and also clears that list is a good rental. A house that only clears 1% is a good listing.
If you're weighing a specific property, we'll run a market rent analysis on it for free. No setup fee, no obligation — and the fee schedule is already on this site, so that part of the math is done.