BiggerPockets

It's not a rule, it's a metric to measure whether there is a deal that fits your strategy or not. 2% is generally attained on properties closer to the $50,000 mark, renting for $1000 a month.

To be stuck to a 'rule' is silly, see the idea for what it's worth, an idea. There are plenty of areas within the US that 2% is definitely attainable, heck even in CA.

2% is something to shoot for, if it doesn't happen in your market...it doesn't happen. Oh and if its being sold at $109,500 good luck getting it for that, the market is HOT right now.

Understand what are 'rules' and what aren't.

Andrew

Sigh! The 2% rule, like the old 1% rule, seems to have taken on a life of its own. It works if the rents are about $500. And interest rates are about 6%. With higher rents and today's low rates, the ratio doesn't need to be so high:

Price: $95,000
Rent: $1,100
Down %: 20%
Rate: 4%
Term: 30
Down Pmt: $19,000
Loan: $76,000
Payment: $362.84
Expense %: 50%
Expense Amt: $550
NOI: $550.00
Cash flow, monthly: $187.16
Cash flow, annual: $2,245.97
Cash on cash: 11.8%

You need to define your deals by discount to current market and yield compared with what investors are expecting in your city.
Your 2 numbers will vary from mine.
For example in Memphis we buy minimum of 20% below what houses are selling for in the street.
And our net yield returns after all expenses must be 11% net.
If I used the 2% rule I would buy a lot of houses in ghettos or nothing at all.

Originally posted by Jon Klaus:
My DFW SFRs average over 2%. My average rent is $925. No class D or war zones.

Jon

I will assume when you purchase the property, your offer is 50 % of what property is really worth.

if this is true, how do you get these offers accepted

Originally posted by Alex R.:

Originally posted by @Jon Klaus:
My DFW SFRs average over 2%. My average rent is $925. No class D or war zones.

Jon

I will assume when you purchase the property, your offer is 50 % of what property is really worth.

if this is true, how do you get these offers accepted

Why would you assume that? I would assume Jon Klaus is buying below market value, but not 50% below. The price-to-rent ratio varies a lot by area. Even here around Denver this varies A LOT. About the best you can do is about 1.5%. Some areas are 0.5% or worse. Many areas across the US are not profitable for rentals. A few work just fine. You may have to go to an outlying area. OTOH, I know Bakersfield is heavily driven by oil. I used to live there and worked for Aera. Its entirely possible that you can't find a better deal in that area than what you described.

I've gotten most of mine through the HUD auctions, but a few REOs, too. At HUD I've bid 12 times for every one I've won. Anywhere from 67%-115% of asking. Average about 85%.

I always felt like my properties were cash flowing really well. Then I heard about this 2% rule and plugged in the numbers. My properties get close to it, but not quit there. Although, I am still very happy with my returns. It's definitely a number to aim for though! Good luck.

Originally posted by Scott W.:
in northern cali, it's very possible rentals are not profitable. so why not flip?

search on here how to do the 50% rule. you can also invest in other states if cali won't cut it for a rental.

Technically speaking, bakersfield is in California central valley not NorCal.
Even Sacramento which is even more north than san francisco, is still a part of central valley.

And as a beginner real estate investor, I want to purchase properties within 15 minutes drive max, let alone in a different state.

Originally posted by Bryan Hennen:
It does if you are in the right market. Check this out. http://www.zillow.com/homedetails/1217-E-Barrett-Ave-Madison-Heights-MI-48071/24654762_zpid/ This is a nice home in a working class Detroit suburb. Nice neighborhood, low crime and low taxes. The home gets 3%.

I used to live in Toledo, Ohio and worked in Ann arbor, MI.

This seems to be a good deal if Madison Heights is not a war zone or drug dealing gangs territory.

I heard in Detroit there are plenty of houses that are vacant and abandoned. State will appreciate you much if you take over some, so those properties will not be their problems anymore.

I don`t get the 2% rule either. It sounds great, don't get me wrong. I just don't see it as a practical figure for most areas.

I will say I live in an area that has a low cost of living, but can`t see the equation as working out much differently elsewhere. As the prices of properties may be higher in other areas, their rent likely goes up in a similar ratio.

Unless we find a really great buy that no one else jumped on too and drove up the price, it most likely would have to be a major rehab, multi-family, or low income housing area to have a chance at the 2% rule.

Not long ago before the housing bubble burst, I believe small real estate investors were simply hoping their rentals would pay for themselves over the course of time and have a nest egg to cash out at retirement. Now seeing people looking for that kind of cash flow every month.. Very different approach. I like to think those that have a decent cash flow and whose properties are covering better than their own expenses will do very well long term so long as the market doesn't stretch much further downward.