2%, 50% & 70% Rule?

Question

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?

Joe Villeneuve · Answer

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.

Che Chiu Wong · Answer

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.

Sean Ploskina · Answer

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.

Rob Beland · Answer

@Kelvin Tamthe 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.)

Joe Villeneuve · Answer

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?

Brandon W. · Answer

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.....

Ian Hoover · Answer

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)

Brandon W. · Answer

@Joe Villeneuve

Sounds good. Thank you for the advice.

Joe Villeneuve · Answer

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.

Brandon W. · Answer

@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?

2%, 50% & 70% Rule?

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