2%, 50% & 70% Rule?

17 Replies

Hi all,

Yesterday I was listening to one of the Podcast and they said about the rule of thumb for 2% rule, 50% rule and 70% rule in real estate investing.

I tried to run a search in Google but it did not really explain it.

Can anyone kindly explain to me in a simple matter what is all this about?

@Kelvin Tam the 2% rule says that your monthly rent should be 2% of your purchase price. This is difficult to achieve in many areas and impossible in many. The 50% rule says to allocate 50% of your monthly rent to expenses. This, imo, is too conservative but whatever. Im not familiar with the 70% rule but if I had to guess its that 70% of the "rules" you hear about from gurus are BS. (I just made that last one up.)

The 70% rule is in regard to flipping. It states that your total cost of acquiring, repairs, holdings, everything should be 70% of the ARV.

All of these are rules of thumb and should be used as a first glance analysis not the final analysis.

These are not rules, they are guidelines that will get you into deals that you really have no idea of the exact numbers, and out of deals that you should have gotten in because they give you false negatives.

Just put 5 more minutes into your analysis, and do it right.  Here is what the "rules" really mean:

2% - Your milk isn't as heavy, tastes like the dairy version of light beer, but you can get used to it.

50% - The percentage of people, so I'm told, that drink 2% milk now.

70% - The percentage of increase over the last 5 years for those now drinking 2% milk...again, so I've been told.

Bottom line is this.  Whether you refer to them as rules or guidelines, don't use them.  Just learn how to actually analyze.  It might take you 5 more minutes, and you'll be better off.

Agree with @Joe Villeneuve ; these are all guidelines (maybe the milk part as well?).

2%, 70% rules are relevant as far as the concept goes.  It's just that different areas have different numbers.

For example, parts of New York, you will jump into it even if you can get 1%.  Parts of NJ, you won't dare to touch even if you hit 2%-3%!

It's better to go through some recently sold houses IN YOUR AREA to figure out what the numbers is.

As another example, I know that in my area the rules will be around 1.0%-1.4% and 75%-85%.   Sometimes there are great deals (which happens rarely), so numbers are based on average "good" deals.

Run your numbers enough and you will able to get a feel for them IN YOUR AREA.

Thx a lot,guys.

At least now I understand more.

The rules are guidelines to be given alot of weight considering the vast experience of real estate investors who came up with them.In short, to stay out of trouble

@Nicholas Daddis idea best and I should just spend time doing an analysis right the first time on everything property I am considering?

Any advice would be greatly appreciated.....

Originally posted by @Brandon W. :

@Nicholas Daddis idea best and I should just spend time doing an analysis right the first time on everything property I am considering?

Any advice would be greatly appreciated.....

 So your question is this?  Should you use an estimating method (i.e. fudge factor) to make decisions of what to do with $100k's of dollars, or, do proper analysis?

@Joe Villeneuve

Thank you for responding.

Not necessarily, My question is the 70% guideline good enough to quickly analyze deals instead of having to do a meticulous analysis on everyone which can take a lot of time.  I heard people say the 70% is good like Brandon Turner then I've heard people such as yourself discredit it evening mocking such an idea. So I want to get to the bottom of this. People who come on this site should be able to get truthful reliable answers to practical  questions this site should aid in heuristic learning.

@Brandon W.

The 70% rule is a good baseline if you live in an average area.  Is it good for you?  I don't know your market.  If you try to use it in California, you probably won't ever get started.  If you use it here in Pittsburgh, you'll be overpaying.  Matter of fact, I live between Pittsburgh and Morgantown, WV.  The 70% rule becomes the 60% rule in Pittsburgh and the 80% rule in Morgantown, in my analysis.

@Jon Behlke

Thank you for responding to my post.

So its Market based so I can run a quick analysis at the 70% and determine if its under or over my Market and adjust from there until I figure out what % is best for my Market. Makes sense Thank You Jon.

Originally posted by @Brandon W. :

@Joe Villeneuve

Thank you for responding.

Not necessarily, My question is the 70% guideline good enough to quickly analyze deals instead of having to do a meticulous analysis on everyone which can take a lot of time.  I heard people say the 70% is good like Brandon Turner then I've heard people such as yourself discredit it evening mocking such an idea. So I want to get to the bottom of this. People who come on this site should be able to get truthful reliable answers to practical  questions this site should aid in heuristic learning.

 My answer really doesn't change...even with you rewording your original question.  The 70%, etc...rules are guesses based on moving criteria.  If you read the pros for using it above, you'll see what I mean.

Your call.  You can guess your way into good deals or bad deals, depending on where the criteria is moving to or from, based on the different markets the rule is applied to, and ...so on, and so on.  I prefer to follow the advice of an old time radio/T.V. cop who said the same thing all the time..."..please stick to the facts".

Analysis is "everything".  You make your money when you buy, and you realize it when you execute your exit strategy.  This means you better do a good job of analysis.

This is also another case of "you don't know what you don't know".  How many deals would you maybe lose out on by not being exact with your analysis?  Learn how to do it right the first time, and you'll save time...not spend extra, and you'll make more profit/cash flow.

@Joe Villeneuve

I understand what your saying. Stick to the live numbers and not what might be..... You don't know until you do a full analysis.

Do you use investment calculators here on BP?

Originally posted by @Brandon W. :

@Joe Villeneuve

I understand what your saying. Stick to the live numbers and not what might be..... You don't know until you do a full analysis.

Do you use investment calculators here on BP?

 No.  I designed a software package (no for sale) for market, rehab and property analysis to do the numbers fast for me.  I got frustrated with the many so called analysis methods and forms that rely on way too many %'s (can you say guesses) that I just said the H..ll with it and did my own...which uses live numbers...actual numbers.

This software started out simple, and grew (did it ever). My suggestion to you would be to figure out whatever criteria you use (the criteria should use numbers with "$$$" in front...and not "%%%" in back of.  I've never paid a bill with a "5" in my life.

These are basic principle, I for sure have purchased homes not meeting the 2% or 50% rules but if I do I need a reason why.

Like a really nice area that will appreciate or every single item that will cost me a large sum of money has been replaced in the last 1-2 years (IE Roof, furnace, a/c, appliances, ECT)

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