SFR Investor · Scottsdale, AZ · Member since 2014 · 49 posts · 11 votes
I have a few rental properties as of now and I am looking to purchase another one in the near future. However since I became a member of BP I have read a lot about the 2% rule and out of my 5 rentals, not one of them meets that rule and I have not come across anything that looks to meet that criteria. I am in the Phoenix Market and would love for someone to show me a property that rents for 2% of the price. I always looked at cash on cash and tried to hit 20% return on cash, but I am interested to hear any examples of homes that people have bought or any that they know of for sale that meet the 2% rule.
Please don't tell me about the house that you bought for 35K in 2010 or 2011 that rents for $700. I am more looking for examples in todays market.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
The 2% rule is only relevant for rents around $500 in any case. Its based on wanting to get $100 in cash flow assuming 100% financing at about 6% with a 30 year fixed loan and allocating 50% of rents to expenses, capital and vacancy. If your rents are, say, $1500, its a lot easier to extract $100 of real cash flow than it is from $500, so this ratio can be lower.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
The 2% rule is only relevant for rents around $500 in any case. Its based on wanting to get $100 in cash flow assuming 100% financing at about 6% with a 30 year fixed loan and allocating 50% of rents to expenses, capital and vacancy. If your rents are, say, $1500, its a lot easier to extract $100 of real cash flow than it is from $500, so this ratio can be lower.
SFR Investor · Scottsdale, AZ · Member since 2014 · 49 posts · 11 votes
12y
@Jon Holdman So basically the 2% rule doesn't apply unless you are buying a house at 25K? It seems to be a major guideline used on this site to help people gauge a rental, I know its used as a ''loose guideline'' but maybe it shouldn't be a guideline.
@Michele Fischer A couple of my properties are in Metro Detroit and I still don't even get close to 2%. Maybe a home in the ghetto with section 8 housing can meet the criteria?
Thanks for the feedback though, both of you. And if anyone finds a 2% property in AZ let me know!!
Investor · Amarillo, TX · Member since 2013 · 139 posts · 51 votes
12y
@Heath S. said and you alluded, its not for all markets. In April of 2013, I paid 47k for a house that needed paint, cleaning, and a new tenant. It rents for $850. This house was probably worth closer to 60-65K but I got a solid deal from an investor that wanted a quick exit and didn't have to pay realtor fees. Thats as close as I got here in Amarillo. Its not a $500 a month rental, but its in a lower class B neighborhood.
In a true working class neighborhood here, you would pay 70-90k for a house that rents for $975-1150. Again, thats not the 2% rule. My rule is that it needs to be over 1%. I focus more on cash on cash, equity capture, and monthly cash flow.
I have seen a few deals that meet the 2% rule, but they usually are in low end properties that require more management and hassle than I am typically inclined for. Honestly, if it meets the 2% rule, I would ask two questions: 1. Do I really want a house in this area? 2. Does this house need so many repairs that it will require enough rehab that its going to push it well below 2%. (Thats okay, but its not truly meeting the 2% rule).
Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
12y
If you want to send me your PM I can send you the BP Rental analysis. But basics are Purchase price after rehab, 25k (Est. we are still getting rehab quotes) and estimated rent of 925. That Meets the 3.7% rule. Once we have the rehab done and a tenant in place we will post the final numbers. At that time we will decide if we want to hold long term or sell.
Property is a 4 bedroom in NW Milwaukee. Rent-o-meter shows rents at @1,000 for a 4 bedroom and $850 for a three bedroom. We are taking a middle of the road approach and assuming 925 for rents.
Rental Property Investor · Visalia, CA · Member since 2014 · 64 posts · 4 votes
12y
I sure glad someone asked this. It seems like every property I look at misses this 2% guideline. Now I know it's been said that this is simply a starting point, but everything I look at is much closer to 1%.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
12y
Plenty of 2% rule houses in the Midwest and southeast however getting that in the non-war zone, owner occupied section of market is the hard part. People of normal means don't rent 2% houses for obvious reasons
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
12y
I believe there are a select few individuals that can get superior deals in many markets, and these people aren't running out and advertising and boasting about their formula. REITs (non SFR) can find 2% or near 2% deals in areas I wouldn't live... because they cost too much! See
SFR Investor · Scottsdale, AZ · Member since 2014 · 49 posts · 11 votes
12y
Yeah, I'm just not sure I believe that these 2% deals are all over the place in the midwest. I think that you may be able to find them, but they are most likely extremely rare, or in an area that you can buy a house for 50K or less. And to be quite honest, I don't think I want to own a house in one of those areas. If you are in a neighborhood with 70K-120K homes, which I think would be a decent blue collar area, you would need to get $1400-$2400/month? Seems unlikely.
@Bob E. Best of luck with the 4% house...It really does sound like a great rental. I just think that either those areas haven't come back in value yet, and you found a super good deal. Or you might risk getting shot at the house while fixing it up. Hopefully its the former of those two. I will be looking forward to hearing how that one goes if you decide to share.
Real Estate Investor · Abington, MA · Member since 2011 · 356 posts · 114 votes
12y
If you are happy with your model then stick to it!
I am in the Boston area and the 2% rule does not apply here. You can buy properties that meet the rule you just have to look in other areas of the country.
I am in the Boston area and own a 3fam and 4fam. I havent been able to get to 2% and havent seen many opportunities that meet that rule. However, I have been able to get the rents to exceeded 1% on both my properties. I look at mortage taxes insurance (MTI) and a get a general sense of repairs and what I should set aside for reserves each month after this if the propertry cashflows I will consider it. Rentometer.com is a great website for getting a sense of FMV for rents.. I always use the lower numbers in my analysis. I work full time so I am not looking to live off the cashflow yet so as long as the property is able to break even after all expenses I am happy with building equity.
Note Investor · Austin, TX · Member since 2012 · 602 posts · 357 votes
12y
I buy non performing notes and I more often or not hit the 2% rule. I usually buy assets worth less then $75K at 25-50% of value. I then either modify, cash for keys/deed in lieu, approve the short sale, short payoff, or foreclose and turn into a rental or sell retail as an REO.
With the way the market is these days (I live in Austin, TX) and I had to find other markets to invest in. I've been buying NPN's since 2007 and I find amazing deals (even in the rust belt states) with multiple exit strategies. I prefer to modify the loan to put less money into these properties in repairs/taxes and upkeep. No one calls the bank when their AC or toilet breaks!!! I also use the Hardest Hit Funds and FHA 10-23 loan modification refinances to also expedite my ROI and return.
I wouldn't pay retail or buy anything over 50% of value by buying the debt. Yes, in some states it does take some time to foreclose, but I'll ride the appreciation in those markets like FL, SC, TN, NC, GA, TX, OK, CO, IN, and IL.
Lebanon, NH · Member since 2012 · 258 posts · 87 votes
12y
Where I owned and still own some rentals in Coastal SoCal people thought you would never even hit the 1% rule again, but there was a brief window from late 2008 to early 2012 it was do-able even in Coastal CA. The window closed a few years ago. But I have found the 1% rule has give me solid cash flow. But 1% on a $150k property ($1,500 rent), is different then 1% on a $30k house ($300 in rent). The lower the price the higher the % should be. On another note, I'm curious how out of state investors do over the long term with these low priced houses as rentals? Are you able to make it work? Get good income and cash flow being so far away?
Homeowner · Fairmont, WV · Member since 2014 · 95 posts · 19 votes
12y
I'm closing on a 9 unit residential/commercial building next week. When fully occupied the monthly rent of about $6k will be about 2.4% of the $244,900 sale price. I'm in north central WV.