2% Rule for Rental Rates v Purchase Price

6 Replies

I'm looking to start investing in real estate.  I have been reviewing the Ultimate Guide.  It mentions the 2% rule.  Basically that my monthly rental amount should be 2% of purchase price.  EX: $100K purchase should yield $2000 monthly rent.  It also mentions this is very hard to obtain.  Anyone out there use this rule or have an average of what their percentage looks like? Or advice on how to apply this rule?

I think it depends on the location, but 1% is more durable. My rental is at 1.1% because the housing price is high over here so the rent go up as well.

@Kareem Slater ,

Like many of the "rules" on here it is really more of a guide to quickly analyze a property to determine if it is worth digging deeper on. The 2% rule is very location and property type dependent. You need to decide where you want to invest and in what types of properties and then determine what the average percentage of monthly rent to price is for what you are looking for. Might be 1%, 1.5%, even less than 1% in high priced markets. 

Personally I wouldn't put too much weight into it in the beginning. I would figure out what the numbers look like when you find a property that works for you and then calculate the percentage to use going forward.

I’ve done a 2 percent rental but probably won’t do it again. I would rather be closer to 1 percent in a better area. Less costs over time.

@Kareem Slater to give specific numbers.  It’s a 2 bed 1 bath 850 square foot townhome type rental.  Rent is going to be 850 (going through a turnover right now) and my entire mortgage, taxes and insistence is 315.  I paid 35k.  I am way over the 2 percent rule, really approaching 2.5 percent.  

But I am a huge believer in maximizing my time.  I like to think “what if I had 10 Of these”.  The answer would be it would require a lot of time.  Compare this one to my other rentals which are basically 1 percent deals and I spend much more time on the one mentioned above.

I think the 2% rule is a bit outdated. The only places you can find a 2% deal by me are places where I'm worried about walking my dog. I think it was a lot more achievable after the big crash.

The better your marketing and more willing you are to look for value add the closer you can get to 2%.

I also think the 2% rule was based in a time period where the cost of financing was much higher so you needed that cushion in order to cash flow.

If after financing, taxes, insurance, and a healthy cushion for expenses you can get worthwhile cash flow and an acceptable rate of return than you shouldn't be too concerned about the price to rent ratio. I do generally look for a minimum of 1% before I take a closer look at the deal.

My properties are at 1.15%, 1.23%, and I'm under contract on an estimated 1.63% that needs a bit of work. I'm new to this, but it's all going well so far.

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