The 1% lease rule typically does not include sales tax or other fees, focusing instead on the base monthly payment relative to the MSRP (Manufacturer's Suggested Retail Price). A good deal is generally considered to be a monthly payment (before taxes) that is ≤ 1 % ≤ 1 % of the car's MSRP.
When looking at a lease deal, you may hear about the "one percent rule." This rule is used for a 36-month lease with a 12,000-mile limit. It involves dividing the monthly payment (before taxes) by the MSRP. A good lease deal will have a percentage of 1% or less.
The "1% lease rule" is a guideline in both real estate (rental income should be 1% of property cost) and auto leasing (monthly payment ideally under 1% of MSRP), used for quickly assessing potential deals, though it's a simplified benchmark that doesn't account for all expenses or market variations. In car leasing, a $40,000 car should ideally lease for around $400/month (before tax), while for real estate, a $200,000 home should aim for $2,000/month in rent.
The 1% rule1 is a popular rule of thumb that can give investors an idea of whether they can earn a return on investment in a rental property. It states that in order for a property to produce a return, it needs to rent for 1% of its purchase price each month.
No sales tax will be paid at the time of registration; however, the lessor must collect and remit sales tax and long-term rental vehicle tax on the monthly (or other periodic) lease payments.
To avoid or reduce car sales tax in Arkansas, you can claim a credit for trading in a vehicle, purchase a used car under the current exemption threshold (currently under $10,000 as of early 2024 legislative changes), use specific exemptions for disabled veterans or government/school entities, or buy a vehicle in a state with no sales tax and register it there, though the state's tax on new cars is generally 6.5% plus local taxes.
The 1% rule states that the monthly rent for an investment property should be equal to or greater than 1% of the purchase price. For example, if a property costs $300,000, you will need to be able to charge at least $3,000 in monthly rent.
Using the One Percent Rule – Some Details
First, the monthly lease payment amount should not include any sales tax. In some states, sales tax is added to each payment. If the state and local sales tax rate is, say 6%, and your lease payment is $300, then you total payment each month is $300 + $18 tax.
The 90% rule in leasing is an accounting guideline for classifying leases, stating that if the present value (PV) of a lessee's minimum lease payments equals or exceeds 90% of the leased asset's fair market value (FMV), the lease should be treated as a finance lease (or capital lease) rather than an operating lease, reflecting essentially a purchase for accounting purposes. This rule helps determine if the lease transfers substantially all the risks and rewards of ownership, requiring balance sheet recognition of the asset and liability.
"I personally think you should never, ever ever ever, lease a car, do you hear me?" she tells CNBC Make It. That's because when you lease, you're pouring in money each month with nothing to show for it at the end of the day. "If you rent a car, you're going to rent a car year in and year out," Orman says.
- Multiply the vehicles MSRP by 1.25%. If your monthly payment is lower than or around this number with 0 money down, then this means your getting a good deal on your lease. If the number is significantly higher then this, you may want to start negotiating or walk away.
Leasing can offer appealing tax advantages for those using their vehicle for business, as lease payments may be deductible. Meanwhile, buying a car allows owners to deduct depreciation and, in some cases, loan interest from their income, making it a more beneficial long-term option for certain taxpayers.
The "1% lease rule" is a guideline in both real estate (rental income should be 1% of property cost) and auto leasing (monthly payment ideally under 1% of MSRP), used for quickly assessing potential deals, though it's a simplified benchmark that doesn't account for all expenses or market variations. In car leasing, a $40,000 car should ideally lease for around $400/month (before tax), while for real estate, a $200,000 home should aim for $2,000/month in rent.
Low Fees and Interest Rates
If your dealer is offering competitive interest rates - often referred to as the money factor or lease factor during lease negotiations - it's a good way to go. Likewise, minimal added fees during the negotiation of the contract are a good sign.
For most situations, if the lease term exceeds 75% of the remaining economic life of an asset and the asset still has at least 25% of its original useful life left, then the lease is considered a finance lease.
A lease on a $45,000 car typically costs $400 to $700+ per month, depending heavily on your down payment, lease term (36 months is common), mileage allowance, the car's residual value (what it's worth at the end), and the money factor (interest rate). For example, with a good credit score and modest down payment on a 36-month term, payments might start around $450-$500, but with more money down or a lower residual, you could see closer to $300-$400 monthly, while less down or higher fees push it up.
Disadvantages of a one-pay lease
A one-pay lease option could be limited to select automakers or dealer franchisees. If a crash totals the car early in the lease, it could result in a complete loss of the upfront payment, so it's worth checking to see if the one-pay lease includes gap insurance.
The key to getting a good deal on a lease is minimizing the difference between the capitalized cost and residual value. You can reduce the difference by negotiating a low capitalized cost or getting a lease deal with a built-in cap-cost reduction.
The "1% rule" might have worked 10 years ago when interest rates were 3 to 4 percent, prices were lower, and rents were higher relative to purchase price. But in 2025, with 6 to 8 percent investor loans and inflated home prices, the math just doesn't hold up anymore.
The 1% rule figure is a straightforward calculation. Simply calculate 1% of the acquisition price plus any immediate and necessary improvements or repairs. The result can be used as a baseline for rental income.