2% rule of thumb

15 Replies

I'm in the San Francisco area. Prices are to high for me so I'm looking one hour away. Like in Tracy CA. I still can't wrap my head around the 2% of sell price should be what you get for your monthly rent. I'm finding things in the 260k range but only getting $1480 rent per month. Any help?

Hi @Jeff Owens I can't really offer any advice I can just share the frustration. I am from the Boston area and the 2 % rule completely doesn't make any sense here either. I am happy that you started this forum. I will be checking to see what other people have to say.

Well @Jeff Owens ! There are certain parts of the country that don't have much inventory that can meet the 2% rule. I live here in Los Angeles and I invest out of state for the very same reason. The markets I do invest in however, I am able to find deals that meet that criteria.

The 2% rule is a form of Gross Rent Multiplier. GRM is one of the crudest forms of evaluating a deal. It is generally a quick screening tool.

Also it is VERY important to note that the 2% number can vary based on your personal situation and investing goals. To some degree also the current market. It is important to run the numbers to find out what kind of GRM works for you. 2% is generally a very safe number and would keep newbies out of trouble. Once you understand the numbers you can adjust for yourself

I'm finding things in the 260k range but only getting $1480 rent per month.

I know there are better deals out there than that. You need to learn how to find them. there are plenty of threads here on finding deals. There is a BP blog post about 100 ways to find deals.

@Mehran K. - What markets have you seen the 2% rule? I am just starting to look out of state myself

@Brianna S. I currently invest in Indiana and Wisconsin. Some areas that have caught my attention before were St. Louis and Kansas City.

@Brianna S. You have to be careful of using the things like the 50% rule and the 2% rule as a criteria. As @Ned Carey mentioned, these are just crude ratios to give you an idea whether a deal will pencil out and that's how you should use them. It's best to clearly define what your objective is for net cash flow, cash on cash return and if financed, debt coverage ratio and how long it will take to pay down the mortgage through cash flow. Things like the 2% rule will give you a quick idea of whether something will achieve your goals. Indianapolis and Kansas City are both good cash flow markets with good rent/price ratios but even in those markets, it's pretty tough to hit 2% these days in good neighborhoods. The thing to be careful of is that by applying an arbitrary 2% rule, it can lead people in to cheap, undesirable markets. Feel free to contact me if you'd like to bounce any ideas around. I'm very familiar with the Indianapolis and Kansas City markets.

Originally posted by @Jeff Owens :
I'm in the San Francisco area. Prices are to high for me so I'm looking one hour away. Like in Tracy CA. I still can't wrap my head around the 2% of sell price should be what you get for your monthly rent. I'm finding things in the 260k range but only getting $1480 rent per month. Any help?

Most people misinterpret the "2% rule of thumb" and get it backwards. You should be saying that if the market rent is $1480, then the most you should pay is 50x that, or $74,000. (1480/.02 = 74000)

When you make offers, you can control what you are offering to buy the property at, but you can't control the market rent, the market does.

But in areas like CA and NY, people will say "that's impossible" but its absolutely feasible in other markets. (People generally say the Midwest is the best for this.) And sometimes you can get properties at greater than a 2% ratio such as 3%. (Which has coined the phrase "3% rule" on the forums.)

@Jeff Owens
I'm in CA also. CA is too expensive to get anything to cash flow let a lone get a rent/price ratio of 2%. It doesn't work here. You'll have to look out of state at more affordable markets.

Here in our market, Fort Wayne, Indiana you can get the 2% rule relatively easily. Now there are still some sellers who don't understand how to price their properties and will be asking $50k for a house that rents for $400, but that's why it sits and I don't even waste my time looking at it. I have several in my portfolio that have even reached 4%+ now these are home runs and don't happen every day, but they do happen.

I think if you are an out of state investor and as @Ned Carey

said you know it fits the 2% rule it will at least keep you outta trouble as long as you do your due dilligence on the other things. Ex) make sure you don't have any big CAP EX expenses(roofs,foundations, mechanicals) that you are going to have to eat in the first couple of years of the rental or buy it knowing that and price it accordingly.

@Jeff Owens

We'd like to get 2% or more, but that is not always possible. I just rented a house last week for the first time. Rent = $895, purchase price =$36,000, so its more than 2%. But the last time it sold it sold for $108,000, which would not even make 1%. All we did to the house was clean and paint, it already had a 4 or 5 year old gas furnace and central air.

@Mike D'Arrigo - of course there is a lot more that goes into investing other than the 2% rule. I am just starting to source markets where that is achievable because in Chicago it is not. I just started looking outside my market a few weeks ago. I am under contract for a deal in Milwaukee but wanted to see what other markets I should be looking in for our next purchase.

" under contract for a deal in Milwaukee "

Congrats @Brianna S.

@Brianna S.

I don't know Milwaukee at all but from what I understand, you can do well there and even get your 2% Good luck with it!

We get on average 1.5% and good cash flow. We are seeing a good chance for market values to increase in the next year. PM me if you would like to hear more about these opportunities.

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