The New (Better) 1% Rule for Real Estate

The rules of real estate investing have changed. For years, investors were using the one-percent rule to quickly determine if a real estate deal would cash flow. But the one-percent rule, rent-to-price ratio, and other common rules of thumb have a glaring blind spot. They account for purchase price, but they don’t account for expenses. Meanwhile, mortgage rates, taxes, and insurance have all risen across the board—expenses that can easily kill your cash flow. So, Dave’s come up with a new rule of thumb you can use to quickly analyze rental properties and markets. He’s calling it the rent-to-payment ratio. By comparing estimated rents to the estimated PITI payment itself, you’ll have a much better idea of whether a rental property will actually cash flow month to month. And today, we’re not just breaking down how the formula works. Dave also built an entire spreadsheet that ranks U. S. real estate markets by their rent-to-payment ratios. Whether you’re looking for the best cash flow markets to invest in or a quick way to weed out unprofitable properties, this is the kind of math you need to make sharper investing decisions in 2026. In This Episode We Cover The “new” rule of thumb for finding great real estate deals and rental markets Why rent-to-price ratio is a flawed metric (and which ratio to use instead) Why the popular one-percent rule no longer works in 2026 The top 10 real estate markets with the highest rent-to-payment ratios How to bake today’s mortgage rates, taxes, and insurance into your initial analysis And So Much More! Check out more resources from this show on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠BiggerPockets.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠h⁠⁠t⁠t⁠ps://www⁠.biggerpockets.com/blog/real-estate-1325⁠. Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠[email protected]⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Dave Meyer?

  This is the new 1% rule for real estate investors. For decades, investors used the 1% rule to pick markets and properties. If a house's rent was more than 1% of the purchase price, it would probably cash flow. But today, 1% rule deals are almost impossible to find in most places. And that rule was created when interest rates and insurance payments and property taxes were much lower. Recently, I've been using a new, different metric, the rent to payment ratio. It's rent divided by your full mortgage payment, including principal, interest, taxes, and insurance. And in my own deal analysis,

• 0:43Dave Meyer?

  it's been a much more reliable predictor of cash flow in 2026. So today, I'm going deep on this 1% rule 2.0, what it does and doesn't reveal about a property, the sweet spot ratio I'd target instead of just chasing the highest number and the full ranking of the top rent to payment markets across the US. This is the new cash flow math you need to know.

• 1:12Dave Meyer?

  What's up, everyone? I'm Dave Meyer, Chief Investment Officer at BiggerPockets. And today, I'm going full data nerd on you guys with a new investing metric, the rent to payment ratio. Now, if you're investing back in the 2010s or even a couple of years ago, you may have heard of a rent to price ratio, or you may have heard of the 1% rule as a rule of thumb for measuring cash flow. That rule of thumb is exactly what it sounded like. You would compare one month of rent to the purchase price of a property. And if it was at or near 1%, your deal was probably going to cash flow. If it was higher than 1%, you were probably getting a great cash flowing deal.

• 1:56Dave Meyer?

  And it was a really useful metric for a really long time. During the 2010s, when interest rates were lower and taxes were lower and insurance was lower, it worked really well. But it has become a little bit outdated. I personally haven't used rent to price ratios in my own underwriting analysis for a while because I don't think it actually tells me that much anymore. First and foremost, it's really hard to find 1% rule deals right now. And it can be really discouraging using a benchmark from a different era when cash flow was easier to find in today's market because you're probably missing good deals and good opportunities using an outdated metric. The other thing is that sometimes now, when you use rent to price ratio,

• 2:41Dave Meyer?

  you might find a deal that looks really good by rent to price. But if it's in an area that has super high property taxes or super high insurance, it might not actually cash flow. And you could actually be getting a false positive because of an outdated metric. So instead, I created a new metric. It is a slight variation on a debt service coverage ratio. If you're familiar with that or if you've used a DSCR loan before, this will be very familiar to you. I didn't like make this up out of thin air. But what I did was pulled together a bunch of different data sources that don't normally talk to each other to create this new metric. What it is, is the rent to payment ratio.

• 3:25Dave Meyer?

  So instead of comparing rent to the purchase price of a property, what I'm doing is comparing the rent to what you're actually paying to your mortgage company each and every month. This is also known as your debt service. That's why it's similar to a debt service coverage ratio. Your full debt service includes your principal, that's paying down your mortgage, interest, that's the profit that goes to the bank, your taxes, super important in this new era of real estate, right? Because taxes have gone up a lot. And insurance, also really important in this new era of real estate. That has gone up a lot, particularly in some markets that are prone to natural disasters. By doing this, you're better incorporating

• 4:10Dave Meyer?

  the expenses that investors are facing on a day to day basis. Instead of just saying that the purchase price of a property is indicative of what your expenses are going to be, this actually measures the majority of your expenses. But it is not a substitute for underwriting your deal. Once you've looked at these deals and thought, okay, this one has at least the benchmark level of cash flow that I am looking for, that's when you go, put it in the BiggerPockets calculator, do the full analysis, understand how this deal is going to add to your portfolio, how it's going to move you towards financial freedom over time. You can't substitute that stuff. You gotta do it. But by using this rent to payment ratio,

• 4:53Dave Meyer?

  you're going to be able to look through markets and deals so much quicker. So if you want to calculate this for yourself, it's actually quite easy. All you need to know is one month of rent and your total mortgage payment. So if you're looking at a deal, just estimate the rent, estimate what the mortgage payment is going to be, divide the rent by the mortgage payment, and you got it. The higher the number, the better cash flow potential it's going to have. And actually, we'll talk about this in a minute. But 1% is actually a pretty good benchmark, similar to the rent to price ratio for this new metric. You still have to go analyze the deals to figure out what it's going to be. But 1% is not a hard and fast cutoff rule. But if you're close to 1%, you should feel pretty good about that market or about that deal.

• 5:38Dave Meyer?

  So calculating it for yourself on an individual deal, super easy, right? You're just taking two numbers and dividing them. Calculating it on a market level is just a little bit trickier because you need to know the average taxes and the average insurance. I was able to gather the top 54 biggest markets in the country. I figured out all this information for you, and I will share that with you in just a minute. And you can download it for free on the BiggerPockets website as well. All right, so hopefully this all makes sense and you're bought in on this new rule of thumb. I'm clearly stoked about it. I've been using it and think it works really well. I'm going to show you the market rankings. And I'm actually going to just walk you through how to use this with a real deal. But we do have to take a quick break. We'll be right-

• 6:23Henry Washington?

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• 7:05Henry Washington?

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• 7:47Dave Meyer?

  Summer bookings sound great until someone slips by the pool, gets hurt on your dock, or damages your property during a long holiday weekend. A lot of short-term rental investors don't realize their standard policy may leave gaps when it comes to short-term rental activity. That's why investors use Steadily. They offer landlord insurance built for real estate investors, including short-term rentals. And if you're a BiggerPockets Pro member, you'll also get 5% off your landlord insurance premiums. Visit biggerpockets.com/landlordinsurance to learn more.

• 8:19Henry Washington?

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• 9:02Henry Washington?

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• 9:24Speaker 02

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• 9:56Dave Meyer?

  Welcome back to the BiggerPockets Podcast. I'm Dave Meyer. Today, we are talking about the new 1% rule for real estate investors. Instead of using the outdated rent to price ratio, we're going to be talking about and using the rent to payment ratio, where you compare one month of rent to your mortgage payment, rather than comparing rent to the purchase price of the property. We are going to talk about how to use this when analyzing a deal. It's super easy, but I'm going to show you and walk you through some actual real live deals in just a minute. But first, I want to show you this spreadsheet that ranks some of the top markets in the country by this new ratio that I created. So what I did was I actually went out and gathered data from a bunch of different sources,

• 10:40Dave Meyer?

  but I used Zillow data for home values. I know people get all up in arms about zestimates, and zestimates on any individual property can vary a lot, I admit that. But actually, when you aggregate zestimates and look at a whole county or a whole city level, it's pretty accurate. I've looked into this, it is pretty accurate. We're also doing the same thing with rents. So when you aggregate the data, it's pretty accurate. I know if your property's estimate is off, I've seen that many times, or your neighbor's is off, I get it, that definitely does happen. But this data, for our purposes here, I do think is reliable. We also, I just found a bunch of different tax sources and aggregated those, and insurance costs as well.

• 11:24Dave Meyer?

  Keep in mind, these are averages, they are not going to be the same for every single property. But what I found is that there are sort of like 10, I would say, elite level cash flow cities in the country right now. These are cities where the average deal has a rent to payment ratio of 1% or above. Those cities, if you're in one of these 10 cities, it is going to be much easier for you to find cash flow than any other city. Now, keep in mind, other cities will cash flow. A lot of these other cities on this list will cash flow, but these ones are going to be the easiest. So those 10 are, I'm going to start with number 10, and I'll just count down. So this is the 10th best, is Milwaukee.

• 12:09Dave Meyer?

  That's at 0.99, I'm rounding up to 1%, 0.99. Then we have Pittsburgh, Pennsylvania, Baltimore, Maryland, Philadelphia, Pennsylvania, St. Louis, Missouri, Hartford, Connecticut, Birmingham, Alabama, Memphis, Tennessee, Cleveland, Ohio, and Detroit, Michigan. Now, you'll probably notice a pattern here. Eight out of 10 here are in the Midwest, and all 10 of them are relatively inexpensive markets. Like, the most expensive market on this list with the highest median home value is Philadelphia with 248,000. That is well below the national average, which is about 440 right now.

• 12:52Dave Meyer?

  But the other markets, like Milwaukee's at 195, Pittsburgh's at 198, Cleveland, 135, and Detroit really stands alone at $72,000. So if you're in any of these markets, cash flow is going to be easier to find than any other markets in the country. Now, you still have to go out and find the right deals, but if you are an investor wondering where to invest, this is such a good way to create a shortlist. You shouldn't use this to pick the whole market, but if you say cash flow is a priority to me, you know, the first 10 or 20 on this list is where I would start my further research. And we've talked a lot on this show about how to do more research into a market, because you can't just use cash flow.

• 13:35Dave Meyer?

  You need to figure out, are there good economic prospects? What are the appreciation is going to be? What's happening with population? Like, you still have to do all of that, but if I were a cash flow focused investor, I'd take the first 10 or 15 here, and then figure out which of them has the best blend of other metrics that are in line with my long-term strategy. So for me, I'm not a pure cash flow investor. So what I would be looking for is like, what's a good hybrid market? I want a market that is going to appreciate, and I'm willing to sacrifice cash flow for some of that appreciation. So when I'm just eyeballing this list, I would say places like Hartford, Connecticut stand out to me. Philadelphia's a good market.

• 14:19Dave Meyer?

  Indianapolis, Columbus, Ohio, those are still below 1%. They're in the top 15 or so, but still really good markets with strong fundamentals, exciting things happening, and do offer good cash flow. Now, if you're looking at this on YouTube, you'll see that I've ranked the markets green, yellow, red. And if you're listening on audio, I'll just let you know. The top 10, the ones I named to you, that, those are green. Those are kind of like the elite level cash flow markets. Then I brought in another 19 markets are in yellow, and those are going to be solid cash flow markets. You could probably still find cash flow in any of these markets, with the exception of New York.

• 15:02Dave Meyer?

  New York just has some unique idiosyncrasies here where it's on this list, but I don't think you could probably find cash flow there. But all the other ones here, maybe not Minneapolis, but a lot of them, you will be able to find cash flow on these deals. Because two things here. First and foremost, 1% rule is not dogma. It is not the be all, end all. It is just telling you how likely it is you are to find cash flow. The second thing to remember here is these are averages. So if you're looking at a city like Buffalo, New York, I'm just picking one random, it has a rent to payment ratio of 0.89. That means that's the average of all of the deals.

• 15:43Dave Meyer?

  So as an investor, you better not be looking for average deals, right? If it's at 0.89, that means by rule, just the math, half of the deals in that market are better than 0.89, right? And so your job as the investor is to go out and find that deal that is better than 0.89. That is a really good way to use this metric. Even if you're in some of these lower markets, like I think Dallas is a great example. It's actually in my third tier by rent to payment ratio at 0.74. It's not terrible, that's still pretty good. But Dallas is a great market.

• 16:25Dave Meyer?

  So can you go out and find a deal in Dallas at 0.9? I bet you can, because half the deals in that city are going to be above 0.74. And so just knowing that 0.74 is the average, and that average is kind of low, your goal should be to say, hey, how much can I beat that average by? How can I much can I beat 0.74 by? And you can do this in almost every market. Now, I'm not going to say every market cash flows. Like, when you get down to the bottom of this list, San Jose, California, Austin, Texas, Los Angeles, Seattle, San Francisco, like, these markets are probably not going to cash flow. They just aren't. It's really, really challenging. Now, I want to just call out a couple of things here.

• 17:10Dave Meyer?

  Like, as we're looking at the bottom here, there are some markets here that used to be great cash flow markets. Like, I'm looking at Houston here, that, you know, for a long time had a good cash flow rate. Or Oklahoma City, for example, which had pretty strong cash flow. I want to just show you, in Oklahoma City, where the average rent is $1,130, the average insurance per month is $814, right? So this is why the rent to payment ratio is important, is because if you're just comparing the rent to the home value in Oklahoma City, you're missing the most important variable here for investors,

• 17:51Dave Meyer?

  which is that your insurance is going to take up about 75% of your monthly rent, just the insurance. You see similar things in Denver, right? Denver has super high insurance. Houston has really high insurance. Houston has the double whammy of high insurance and high taxes. If you put the average taxes and insurance for Houston together, it's 1,100 bucks. Meanwhile, your rent is under 1,700. So just looking at this, in Houston, on average, you can see your monthly payment is significantly more than your rent. Like, there's no way you're going to get cash flow unless you get a screaming deal. And obviously, I shouldn't have said this earlier, but these are for on-market deals, so like, they're as-is.

• 18:37Dave Meyer?

  So if you're doing a heavy renovation and a burr, you can reconsider this, right? The way you would do that is by evaluating the future rent that you're going to get once you renovate the property by your future payment, once you refinance. That's how I would look at it. Future rent, future payment. Calculate your rent to payment ratio that way. One other thing I want to call out is on the total opposite end of the spectrum, these markets, Detroit, which really stands alone in terms of its rent to payment ratio. It's at 2. That's really high. The average payment in Detroit right now is $642, where the average rent is nearly $1,300. That's amazing, right?

• 19:20Dave Meyer?

  So if you're looking for pure cash flow, Detroit stands alone. But Detroit, similar to Cleveland and to Memphis and Birmingham, sort of these first four markets at least, there are trade offs in these markets. They may not appreciate in the same way that other markets do. Now, a lot of them have been growing in recent years, but you know, in this new great stall era, I do personally expect a reversion to the mean for a lot of these high-flying cities. That doesn't mean they're necessarily going to turn negative, although some of them could turn modestly negative. It's just important that you understand the fundamentals. Detroit is recovering as a city, but as an example,

• 20:01Dave Meyer?

  its population has really declined since the financial crisis. And so there is an oversupply of homes. There might be high vacancy rates. This is why you can't just take this metric and use it to evaluate everything. If you really want cash flow, look at Detroit, but make sure you're buying in a good pocket of Detroit where there's going to be strong rental demand and home values are going to go up. You can do that. That absolutely exists in Detroit. I've been looking at deals there. Like that definitely works. That works in Cleveland, but don't just assume because it's the highest rent to payment ratio that it's like automatically a good buy. So that's how you use this at a market level. Again, you use it by comparing to one another, the relative availability

• 20:45Dave Meyer?

  of cash flow. And then two, once you pick a market, knowing what the average is and then using that to set a baseline for what your deals are going to be. They're going to have to beat that level. That's how you use it at a market level, but it's also really valuable at a property level. And to show you how to do that, I'm just going to actually pull up a listing. But before we do that, we have to take one more quick break. We'll be You know, when I first started sharing my real estate journeys online, I didn't have a website. I had a spreadsheet, an Instagram account, and no idea how they'd ever connect. I remember thinking a real website was going to cost me thousands of dollars and take a developer weeks to build. So I kept putting it off. Then I found Hostinger. I typed in

• 21:29Dave Meyer?

  what I wanted, a site to show off my deals, share my story and capture leads. And their AI builder had a working version live in minutes. No code, no designer, no developer needed. And it didn't stop at launch. Once my site was live, Hostinger's AI agent helped me figure out what to try next, acting like a built-in team of specialists for SEO, website copy, email marketing, and more. Domain, website, email, marketing. One Hostinger account covers it all. So you're not stitching together five subscriptions or wondering if they even talk to each other. Plans start at just $3 a month, so you can begin at your own pace and build from there. Hostinger builds your vision step by step. Create your

• 22:13Dave Meyer?

  website today. Go to hostinger.com/realestate and use code REALESTATE for 10% off now.

• 22:20Henry Washington?

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• 23:05Henry Washington?

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• 23:21Dave Meyer?

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• 24:02Dave Meyer?

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• 24:46Dave Meyer?

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• 25:57Dave Meyer?

  Right back.

• 26:01Dave Meyer?

  Welcome back to the BiggerPockets Podcast. I'm Dave Meyer, today talking about a new rule of thumb that I think everyone should be using, the rent-to-payment ratio. Before the break, we talked about how to calculate this and how to use it at a market level, but I'm just going to show you how to use it at a property level. And to do that, I am going to look for a property in Memphis. I just used my list and instead of using Detroit because it's kind of an outlier, I just picked another one of the the high-up markets that have a strong rent-to-payment ratio. And I'm going to just pick the first one here on our list on Zillow. I'm just going through Zillow. I just searched for multifamily here. And we found a property on Harvard Avenue. It is listed at $340,000.

• 26:45Dave Meyer?

  It's a six-bed, two-bath, built in 1927, a little bit older, but it is 3,200 square feet. It actually looks nice. The bricks, you know, had some tuck pointing, so there's some work done there. The roof is in pretty good shit, but it's it's got some charm. It's a nice house. Seems like it's in a decent neighborhood, for sure. What I would do if I were looking at this deal is first and foremost, I always look at the pictures just to see like, is this place reasonable? And I actually like what I'm seeing here. We got hardwood floors. We have fresh paint. The kitchen definitely needs an updating, which I like personally. I think that's great. That's a sign of a cosmetic rehab opportunity. Yard needs a little bit of work, but it's not bad. There's a nice fence. Like, it's

• 27:28Dave Meyer?

  a good property. So what I would do in this scenario is just quickly calculate the rent-to-payment ratio. And lucky for us, if we look at this duplex, they have listed the actual leases. So we don't even need to estimate the rent here. What we know here is that our rent is going to be $1,255 for the lower and $1,385 for the upper unit. And what we get there is $2640. So this property is pulling in $2640. So already in my head, I'm asking myself, is my monthly payment on this mortgage going to be more or less than $2640? Let's

• 28:10Dave Meyer?

  find out. To do that, I'm just going to pull up the BiggerPockets Mortgage Calculator and figure out what our payment is going to be. So I'm going to just assume that we're paying full price for this. So my loan amount, if I'm putting out 25% as an investor, is going to be $255,000. I'm going to do a 30-year fixed. Interest rate's probably around seven right now. Our annual taxes, they're pretty high, are $9,800. And on the listing, the insurance is estimated at $1,350 a year. So I'm going to just hit calculate my monthly mortgage payment. And what we got here is $2625. So this is darn close to a 1% rule

• 28:54Dave Meyer?

  deal. Pretty good, right? Because what we found is that our monthly payment is $2625, our monthly rent is $2640, and if you do $2640 divided by 2625, it's basically 1.01%. So we got a 1% rule here in Memphis. But remember, in Memphis, our average deal was going to be 1.17. And so while this deal probably will cash flow, it is probably not the best cash flow opportunity we can find in Memphis, because we know that on average, the ratio is a bit higher.

• 29:38Dave Meyer?

  Now, I'm not saying that you shouldn't buy this deal because when I look at this deal, I'm like, can I fix this thing up, put 20 grand into it and bring our rents from 2640 up to 2800 or 2900? If so, might be worth buying this deal. But if I'm looking for a turnkey kind of investment where I just put tenants in, because this place is nice enough, you could just put tenants in. Like, this probably isn't the best pure cash flow opportunity. So, the way I would look at this and use this ratio is instead, I would look for another deal. So, let's just see if we can find another one. Let's look at this duplex instead. This is a six-bed, three-bath.

• 30:21Dave Meyer?

  It's cheaper, so it's about $300,000. The kitchens are a little bit older, but it's still in decent shape. Like, you could definitely rent this out today. Like, the kitchens, I would put a little bit of money on if it would me, but you could rent this right now. Now, these are big units. They're three-bed, two-bath. And so, I'm going to assume that I can get 2,500 bucks in rent for this. And so, we're taking out a smaller loan at 225, and then our annual taxes are going to be cheaper at around 7,000. Our insurance, I'm just going to assume is going to be the same. And now, we're getting 2,192. So, this is a better cash flowing deal.

• 31:01Dave Meyer?

  So, 2,500 divided by 2,192, what do we got? Now, we have 1.14. This is closer to the average for the area. So, this is a deal I would consider personally. I think this is a better cash flowing opportunity. I think there's a better upside on this deal personally for a cosmetic rehab, because if you just look at it, like, we could maybe drive the rents up to 2,800 on this by fixing it up. It's a nice property, but just needs some work inside. And the other thing I like about this is this one's been sitting on Zillow for 55 days. So, I'm probably going to get this below what they're asking at 295, right? Let's just assume we get a little bit of a discount.

• 31:46Dave Meyer?

  We get it at 280. If we do that and update our payment, now, we're at 2076. If we divide 2,500 by 2076, now, we're at a 1.2. So, even if you don't do the renovation, if you just buy this at a little bit of a discount, 15 grand off, after sitting for 55 days, you buy this thing at a discount, now, you're getting a 1.2. Now, that's above the average. Now, you'd go do the renovation, that's a really good opportunity. So, of course, I would have to do more due diligence and do a full analysis on the BiggerPockets calculators to understand if this is the kind of deal that I want to buy. But just in those five minutes, I just showed you, that first deal, I thought was going to be good.

• 32:29Dave Meyer?

  I looked at it, and I was like, this is going to be a good deal. And it was. It probably would cash flow, but two minutes later, I found another deal that has better cash flow opportunity. Still going to do analysis on the second one, but it allows me to say, I'm better off spending my time digging into that second deal than I am the first one. That's what rules of thumb are for. They're not the absolute be-all, end-all of any analysis. They're used to help you save time and to eliminate deals that are clearly not going to work and to spend your time on the deals that have a high potential of penciling out. So, go out and do this for yourself. Like, hopefully, you can see how useful this is. We will put a link to the spreadsheet for the markets below.

• 33:14Dave Meyer?

  And then, go out and calculate this on deals, on Zillow, Redfin, Realtor, whatever you use. Go check out some deals and see if it works. Go see where the best rent-to-payment ratios are in your market, or compare between two different markets and see which one have a better cash flow perspective. Once you've done that, go really work hard to estimate your rents, estimate your expenses. Put all of that into the BiggerPockets calculator. You just go to biggerpockets.com/calulator. Go calculate the deal, see what the cash-on-cash return is going to be, what your annualized return over time is going to be. You've still got to make great offers, you've got to do the work, but this rule of thumb,

• 33:56Dave Meyer?

  I think, will help you streamline your deal flow and your analysis so much. It's been helping me a lot, and hopefully, this completely free tool that you can use can help you find your next deal as well. Before we go, though, I do just want to reiterate, although higher rent-to-payment ratio does indicate better cash flow potential, the higher the number does not mean that is a better deal. You heard me just talking through those two deals. Some deals are going to have a better opportunity for value add. They're going to be in a better neighborhood. They're going to have better demand. So, you need to think about that. And I actually think oftentimes, if the rent-to-payment ratio is too high, that's actually a

• 34:39Dave Meyer?

  red flag, because there's something wrong with that property. If it is priced really inefficiently, sometimes it happens where some people just price properties poorly. I have been the beneficiary of that several times in my career. It sometimes happens. But it's a red flag, too. It's something you need to investigate. I think in this kind of market, if you can find a deal that's in the like 0.8 to 1.1 ratio, that's probably going to be pretty good. That's after you do a renovation. So, the deal you might buy might not pencil, but if you're going to do a cosmetic rehab or you're going to do a rehab and drive up the rents, if you can get in that 0.8 to 1.1, you're probably going to find a good deal. Again, it's a rule of thumb. It's not going to work for every single time.

• 35:24Dave Meyer?

  This is just a means of filtering deals, and I'd love to hear how it works for you. Like I said, it's been working for me, but let me know in the comments if this new ratio, this new rule of thumb, this new 1% rule is something you're going to be using in your own investing. I would love to hear how you're using it. Share it with the BiggerPockets community. That's our episode for today. Thank you so much for watching this episode of the BiggerPockets Podcast. We'll see you next time.

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