Real estate investors use quick formulas to screen deals before diving into detailed analysis. These rules of thumb aren't perfect, but they're fast - and speed matters when good deals disappear in hours. Master these formulas and you'll spot winners and losers at a glance.
Why Quick Formulas Matter
Professional investors analyze 50-100 properties before buying one. Detailed analysis on each would take forever. Quick formulas let you filter out obvious losers in 30 seconds, so you can spend time on potential winners.
Think of these formulas as your first filter. They're not the final answer, but they tell you if a property deserves deeper analysis. Pass the quick test? Run full cash flow analysis. Fail the quick test? Move on to the next listing.
The 1% Rule: The Classic Screening Test
The 1% Rule
What it measures: Whether rent is high enough relative to purchase price for positive cash flow.
$200,000 property → needs $2,000/month rent to pass
$150,000 property → needs $1,500/month rent to pass
$300,000 property → needs $3,000/month rent to pass
When properties pass: Usually indicates strong cash flow potential. Common in Midwest, South, secondary markets.
When properties fail: Most expensive coastal markets. Doesn't automatically mean bad deal - might be appreciation play.
Reality Check: The 1% Rule in 2025
The 1% rule is increasingly hard to achieve in competitive markets. Adjusted guidelines:
- 1.2%+: Excellent cash flow (rare, usually distressed properties or tertiary markets)
- 1.0-1.2%: Good cash flow potential
- 0.8-1.0%: Acceptable in balanced markets, verify with detailed analysis
- 0.7-0.8%: Marginal, likely appreciation play
- Below 0.7%: Usually won't cash flow, pure speculation on appreciation
💡 Pro Tip
In expensive markets (SF, LA, NYC), modify to the 0.7% rule as your baseline. In cash flow markets (Memphis, Cleveland, parts of Texas), stick with 1% minimum. Know your market.
The 50% Rule: Estimating Operating Expenses
The 50% Rule
What it measures: Quick estimate of all non-mortgage expenses.
Monthly rent: $2,000
Estimated operating expenses: $1,000
Mortgage payment: $1,300
Estimated cash flow: $2,000 - $1,000 - $1,300 = -$300 (negative!)
What's included in the 50%: Property taxes, insurance, maintenance, CapEx reserves, vacancy, property management, utilities (if landlord-paid), HOA fees, accounting/legal.
What's NOT included: Mortgage payment (principal and interest). That's separate.
When the 50% Rule Works
Most accurate for: single-family homes, townhouses, small multi-family (2-4 units), properties in average condition, moderate property tax areas.
When to Adjust the 50% Rule
Use 40-45% for: new construction, properties with low taxes, tenant-paid utilities, multi-family (5+ units with economies of scale).
Use 55-60% for: older properties needing frequent repairs, high property tax areas, landlord-paid utilities, high HOA fees, properties with deferred maintenance.
⚠️ Warning
The 50% rule is a rough estimate. Always run detailed analysis before buying. But if a property fails the 50% rule, it'll almost certainly fail detailed analysis too.
The 2% Rule: The Aggressive Cash Flow Test
The 2% Rule
What it measures: Exceptional cash flow properties.
$100,000 property → needs $2,000/month rent
$150,000 property → needs $3,000/month rent
Where you'll find 2% properties: Distressed properties in secondary markets, C/D class neighborhoods, properties needing renovation, seller financing deals, foreclosures.
The catch: Properties meeting the 2% rule often have higher risk - difficult tenants, declining neighborhoods, high maintenance, lower appreciation potential.
The 2% rule is rare in 2025. If you find one, dig deeper - make sure it's not a trap. Sometimes a "great deal" on paper is actually a terrible property in a dying neighborhood.
The 70% Rule: For House Flippers
The 70% Rule (Fix & Flip)
What it measures: Maximum price to pay for a fix-and-flip property.
ARV: After Repair Value (what property will sell for after renovations)
ARV: $300,000
Repair costs: $50,000
Maximum offer: ($300,000 × 0.70) - $50,000 = $160,000
Why 70%? Covers your profit (15-20%), holding costs (5-7%), selling costs (6-8%), and safety margin (2-5%).
Variations: Some flippers use 65% in expensive markets or 75% in cheaper markets. Adjust based on your experience level, market competition, and risk tolerance.
The BRRRR Formula: Buy, Rehab, Rent, Refinance, Repeat
BRRRR Target
Goal: Buy and renovate for less than 75% of final value, then refinance to pull most/all capital back out.
Purchase: $180,000
Rehab: $40,000
Total invested: $220,000
After-repair value: $300,000
Refinance (75% LTV): $225,000
Capital recovered: $225,000 - $220,000 = $5,000 back + equity of $75,000
The magic: You've essentially acquired a $300,000 property with nearly zero money left in the deal, generating cash flow, and can repeat with another property.
Cap Rate Quick Estimates
Quick Cap Rate Formula
Why 0.6? Assumes 40% operating expense ratio (conservative version of 50% rule).
Annual rent: $30,000
Purchase price: $300,000
Estimated cap rate: ($30,000 × 0.6) ÷ $300,000 = 6%
Quick way to estimate cap rate without calculating detailed NOI. Close enough for screening purposes.
Break-Even Occupancy Formula
Break-Even Occupancy
What it measures: What occupancy rate you need to cover all costs.
Annual gross rent: $36,000
Operating expenses: $14,400
Annual debt service: $19,200
Break-even: ($14,400 + $19,200) ÷ $36,000 = 93%
Good: Below 85% (comfortable cushion)
Acceptable: 85-90%
Risky: Above 90% (very little margin for error)
Combining Formulas for Power Screening
Use multiple formulas together for fast, comprehensive screening:
Step 1: The 1% Test
Does monthly rent equal 1% of purchase price? If no, property likely won't cash flow. If yes, continue.
Step 2: The 50% Rule Test
Rent × 0.5 - Mortgage = estimated cash flow. If negative, pass unless appreciation is very strong. If positive $200+, continue.
Step 3: Quick Cap Rate
(Annual rent × 0.6) ÷ Purchase price. If below 5% in your market, probably overpriced. If above 7%, continue.
Step 4: Run Detailed Analysis
Property passed all three? Now it's worth your time to calculate actual expenses and cash flow.
Property: $250,000, rent $2,200/month
1% Test: $2,200 ÷ $250,000 = 0.88% → FAIL (barely)
50% Test: $2,200 × 0.5 = $1,100 available for mortgage. At 7%, can support ~$165K loan. Need $85K down (34%) → MARGINAL
Cap Rate: ($26,400 × 0.6) ÷ $250,000 = 6.3% → PASS (decent)
Verdict: Borderline property. Worth detailed analysis if market has strong appreciation, but not a slam dunk.
When Formulas Don't Apply
These rules have limitations:
- Unique properties: Luxury rentals, vacation homes, commercial properties
- Value-add opportunities: Properties you'll significantly improve
- Unusual financing: Seller financing, assumed loans, partnerships
- Market transitions: Gentrifying neighborhoods, rent control expiring
- Portfolio strategy: Trading cash flow for appreciation, or vice versa
In these cases, formulas provide a baseline but detailed analysis is essential.
Calculate Your Property's Actual Returns
Quick formulas are great for screening, but don't buy without detailed analysis
Use Our Calculators →The Bottom Line
Quick formulas are power tools in your investment toolkit. The 1% rule screens for cash flow potential. The 50% rule estimates expenses fast. The 2% rule identifies exceptional deals. The 70% rule guides flip offers.
But remember: these are screening tools, not buying tools. They tell you if a property deserves detailed analysis. They don't tell you to write an offer.
Use formulas to filter fast, then run the actual numbers on properties that pass. This two-step process lets you analyze more deals in less time while maintaining analytical rigor on serious candidates.
Master these formulas and you'll spot good deals faster than 95% of investors. That speed advantage means you'll get first look at properties before they're picked over. In competitive markets, that's the difference between building a portfolio and constantly losing bidding wars.