Investor · Los Angeles, CA · Member since 2013 · 32 posts · 3 votes
I am curious about the 2% rule. I am seeing it used when people talk about a property under 80k or so which is not realistic in California. Also, If one were to purchase a 4 unit in California at about $400k (which is good), a 2% of $400k is unrealistic for a monthly rental income. Am i misunderstanding this concept or does my theory hold true in California?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
First, the "2% rule" is largely irrelevant everywhere. It works if you're talking about properties that rent for about $500 and paying 6% interest on a mortgage.
The 50% rule, OTOH, which says expenses, vacancy and capital are about 50% of your gross scheduled rents, seems to be pretty accurate everywhere. So, you can use that to calculate your cash on cash return and see if you like the numbers. You don't say what the rents are, so I'll pick $1200 per unit per month out of the air. Here's ways your deal looks like:
Price: $400,000
Rent: $4,800
Down %: 20%
Rate: 4.25%
Term: 30
Down Pmt: $80,000
Loan: $320,000
Payment: $1,574.21