The 7% rule is a quick-screen ratio some real estate investors use to compare a property's expected annual rental income to its purchase price, as a fast way to filter deals before running full underwriting. Unlike the widely used 1% rule, the 7% rule is not a single standardized industry term - different investors apply it slightly differently, so it is worth understanding the logic behind it rather than treating it as a fixed law.
How the 7% Rule Is Typically Calculated
The most common version states that a property's gross annual rental income should equal at least 7% of its purchase price for the deal to be worth a closer look. On a $300,000 property, that means the lease should target roughly $21,000 a year, or about $1,750 a month, before the deal clears this first screen.
How It Compares to the 1% Rule
| Rule | Threshold | On a $300,000 property |
|---|---|---|
| 1% rule | Monthly rent >= 1% of price | $3,000/month, or $36,000/year (12% annualized) |
| 7% rule (rent-to-price version) | Annual rent >= 7% of price | $21,000/year, or $1,750/month |
The 7% version is meaningfully looser than the 1% rule, which is one reason some investors treat it as a minimum floor rather than a target - a deal that only clears 7% annually may still fail once real expenses, vacancy, and financing costs are applied.
Should You Trust the 7% Rule on Its Own?
Any percentage-of-price rule ignores property taxes, insurance, maintenance reserves, vacancy rate, and financing terms - all of which vary significantly by market and property age. A property that clears the 7% threshold in a high-tax DFW county can still cash-flow negative once carrying costs are modeled properly. Use these rules to filter a long list down to a shortlist, never to make a final purchase decision.
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