Marjorie's Real Estate Confessions… Spilling the (Real Estate) tea, one confession at a time!

How to Use These Popular Investor Formulas

By Marjorie Pellegrini, Broker/Owner – Go North Realty

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If you’ve spent more than ten minutes in a real estate investing forum, you’ve heard the buzzwords:

🔸 “It hits the 1% Rule!”
🔸 “I ran the 50% Rule—it pencils out.”
🔸 “The 70% Rule says we’ve got room for profit.”

These rules are everywhere. And they’re great—for fast filters.

Here’s the problem: they’re shortcuts, not strategies. If you follow them blindly, they can lead to bad buys, missed deals, or worse—major ROI miscalculations.

In this article, we’ll break down:

• What each rule means
• When it actually works in today’s market
• What it leaves out
• Real-life examples that test all three
• When to toss the rulebook and do a deep dive

Ready to level up from rule-following to rule-understanding? Let’s get into it.

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What Is the 1% Rule?

📌 Formula:
Monthly Rent ≥ 1% of Purchase Price

If a property costs $250,000, it should rent for at least $2,500/month to “meet the rule.”

💡 This is used as a quick screen for potential cash flow.

Pros:

✅ Fast deal filter
✅ Easy to apply
✅ Helps identify high-rent, low-price markets

Cons:

❌ Ignores expenses, financing, or condition
❌ Doesn’t work well in high-cost markets
❌ A 1% deal can still lose money if expenses are high

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What Is the 50% Rule?

📌 Formula:
Operating Expenses ≈ 50% of Gross Rent

If rent is $2,000/month, estimate $1,000/month in expenses—before paying your mortgage.

Pros:

✅ Quick cash flow estimate
✅ Useful when doing initial numbers without full details
✅ Helps weed out unrealistic expectations

Cons:

❌ Expenses can range from 30% to 60% or more
❌ Doesn’t apply to new builds, condos with HOA, or furnished rentals
❌ Can give a false sense of security

🛠️ Better to use when comparing similar property types (e.g., duplex vs. duplex).

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What Is the 70% Rule?

📌 Formula (for flippers):
Max Purchase Price = 70% of ARV – Repair Costs

ARV = After Repair Value.
Example:

• ARV = $300,000
• Repairs = $40,000
• Max Offer = $300K x 70% = $210K – $40K = $170,000

Pros:

✅ Helps ensure margin for profit
✅ Protects flippers from thin deals
✅ Widely used by wholesalers

Cons:

❌ Based on outdated margins in some markets
❌ Doesn’t account for holding costs, closing fees, or commissions
❌ Assumes perfect resale timing

💡 Many experienced investors now adjust to 75–80% Rule in hot or low-inventory markets.

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Real-Life Examples – Do the Rules Hold Up?

🔹 Property A: Turnkey Rental

• Purchase Price: $225,000
• Rent: $2,100/month
• Expenses: $800/month
• Mortgage: $1,000/month
• Cash Flow: $300/month

🧮 1% Rule? Almost! 0.93%
🧮 50% Rule? Nope! Expenses only 38% of rent
✅ But still pencils with positive cash flow.

Verdict: Rules say “maybe,” but real numbers say “yes.”

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🔹 Property B: Fix-and-Flip Opportunity

• ARV: $400,000
• Estimated Repairs: $60,000
• Asking Price: $285,000
• Target Margin: $30K minimum

🧮 70% Rule Max Price: $400K x 0.70 = $280K – $60K = $220K
❌ Asking $285K = 16% too high

But… the market is hot. Renovations are minimal. Holding time is short. After costs, projected profit = $25K.

Verdict: 70% Rule says no—but investor with tight ops may say yes.

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🔹 Property C: High-Cost Market Condo

• Price: $350,000
• Rent: $2,000/month
• Expenses: $1,200 (incl. $400 HOA)
• Mortgage: $1,400
• Cash Flow: –$600/month

🧮 1% Rule? Nope! Only 0.57%
🧮 50% Rule? Closer to 60%
🧮 70% Rule? Not relevant (not a flip)

Verdict: Every rule fails—and so does the deal. 🚫

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So… Which Rule Actually Works in 2025?

The truth? None of them—on their own.

These rules are best used as:

✅ Initial screening tools
✅ Fast math for busy investors
✅ Red flags when a deal looks too good

But once a property passes the sniff test, you must dive deeper:

• Run full cash flow analysis
• Include real-world expense estimates
• Look at loan terms, taxes, insurance
• Know your exit strategy

Don’t let a property pass just because it hits the 1% Rule.
Don’t reject a winner just because it misses the 70% mark.

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When to Trust the Rules—and When to Ignore Them

Trust them when:

• You’re reviewing 10+ deals quickly
• You’re investing in stable, predictable markets
• You’re comparing similar property types
• You’re just getting started and need simplicity

Ignore them when:

• You’re buying in high-cost, high-appreciation markets
• You’re house hacking or short-term renting
• You’re financing creatively (seller finance, HELOC, etc.)
• The property has hidden potential (ADU, zoning upsize, etc.)

📣 Rules don’t replace thinking. They help you ask better questions.

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Smart Investor Tips to Go Beyond the Rules

🧮 Always build a full pro forma spreadsheet
📉 Stress test your deal at 10% vacancy or 10% rent drop
📊 Track your own market-specific rules
👥 Network with local investors—see what they’re using successfully
📍 Consider location-driven exceptions (e.g., waterfront, downtown, seasonal demand)

🎯 Real investing isn’t about hitting rules—it’s about hitting goals.

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WRAP-UP:

The 1%, 50%, and 70% rules are like compass points—they help you navigate. But they won’t drive the car.

Use them as a starting line, not a finish line.

The best investors know when to follow the rules, when to bend them—and when to break them because they ran the real numbers.

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📊 Want help analyzing a deal that almost fits—but not quite? Let’s pencil it out together.
Schedule your free ROI review with me at https://calendly.com/gonorthrealty/roi-review-with-marjorie.

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Next up in the series:
Cap Rate vs. Cash-on-Cash Return: Know the Difference or Risk Losing Thousands