The rule says a rental should produce monthly rent equal to at least 1% of the purchase price. A $300,000 house should rent for $3,000. In most of Phoenix in 2026, almost nothing does.
The rule is not wrong. It is a filter with a specific and useful property: it needs only two numbers, both of which are on the listing, so it can be applied to a whole market in one pass. That is its entire job.
The four things it cannot see
- Property tax. A Mesa asset and a Buckeye asset at the same price and rent carry effective rates of roughly 0.52% and 0.66%. That is about $470 a year of NOI difference on a $340,000 property, invisible to rent-to-price.
- Insurance. A pool adds roughly $420 a year to a policy and about $960 a year in service. A mapped flood zone adds a required separate policy.
- HOA. A $185 monthly association fee is $2,220 a year of fixed expense that exists whether or not the unit is occupied. Two identical rent-to-price ratios, one with an HOA, are not the same deal.
- Condition. A 2004 house with all-original mechanicals and a 2020 house with none due carry very different reserve requirements, and the ratio is blind to both.
What the ratio is genuinely good for
Ranking within a single product type and submarket, where the invisible variables are roughly constant. Comparing two 3/2 houses four streets apart, rent-to-price is a fine first cut.
Detecting mispricing. A row well above its submarket’s rent-to-price median is either a data error, a condition problem, or a genuinely interesting listing — and finding out which one takes ten minutes rather than an hour.
Talking about a market quickly. "Nothing in this submarket clears 0.7%" is a useful sentence.
The rule of thumb we actually use
Screen on rent-to-price to get from a market to a shortlist. Rank the shortlist on cap rate, because that carries the expense structure. Decide on DSCR and cash-on-cash, because those carry the financing, and financing is where a deal is actually won or lost in this rate environment.
Three different metrics for three different jobs. Using one of them for all three is the mistake.