The 1% rule, 50% rule and napkin tests

The 1% rule says monthly rent should be about 1% of purchase price.

The 50% rule says operating expenses may run around 50% of income before debt.

Both are blunt screening tools. They can save time. They can also embarrass you if you treat them like a model.

Napkin tests are pocket rulers. They answer “is this worth measuring properly?” They do not inspect leases, price insurance, predict repairs, or negotiate with the tax assessor. The ruler is not defective. The person measuring an entire building with it is getting ambitious.

What the ruler can and cannot reach

Test	Useful for	Not useful for
1% rule	Quick rent-to-price sniff test	Multifamily valuation precision
50% rule	Rough expense sanity check	Actual expense budgeting
Price per unit	Market comparison	NOI quality
Rent per square foot	Comp screening	Lease durability

The napkin gets you to the next question. It does not answer the question.

Use a shortcut to cut the review queue, not to cut diligence. A five-second screen can earn a deal another hour. It cannot earn the deal your money.

The 1% rule takes one measurement

A small rental is listed for $220,000 and rents for $1,800 per month.

Rent-to-price:

$1,800 / $220,000 = 0.82%

It fails the 1% rule. That does not automatically mean it is bad. Maybe expenses are low, growth is strong, or the location is exceptional. Or maybe the price is too high and everyone is trying to make “location” do unpaid labor.

The 0.82% reading tells you the relationship between current rent and price. It does not know the tax bill, insurance premium, vacancy, repairs, management cost, utilities, financing, or capital work. One dimension is not a property. It is a reason to open the file—or close it.

The 50% rule meets the actual bills

If gross income is $21,600 per year, the 50% rule estimates expenses at:

$21,600 x 50% = $10,800

If actual taxes, insurance, repairs, vacancy, management, utilities, and capex reserves are $15,400, the rule was not conservative enough. The property does not care that the napkin was confident.

That $4,600 gap is the price of replacing a ratio with the property’s bills. The rule offered a rough silhouette. The tax bill, insurance quote, repair history, and management agreement walked in with names and amounts.

Gate the deal, then replace the shortcut

Use napkin tests as a gate:

Result	Next step
Clearly weak	Move on or ask for a major price/assumption explanation
Borderline	Build the real model
Strong	Still build the real model

Then replace every napkin estimate with a source: tax bill, insurance quote, rent roll, T-12, repairs history, management fee, and reserve schedule.

Watch for the shortcuts trying to overstay:

• The 1% rule is presented as proof of cash flow.
• The 50% rule replaces an available expense history.
• “Strong market” is asked to explain a weak current ratio.
• A clean screen is treated as permission to skip the loan and repair work.

Passing a napkin test means the deal has qualified for underwriting. That is not the same as qualifying for purchase.

Keep fast math in the screening lane

Let napkin math be rude and fast. Then make underwriting slow and documented. Confusing those two speeds is how people buy a spreadsheet instead of a property.

Your next move is to run the quick screen, write down exactly what it ignores, and replace each placeholder with a source before making a decision. The pocket ruler can tell you where to look. Put it away before somebody asks it to certify the foundation.