2% Rule and 50% Rule

[Zachary Ballou]

Due to the fact I am only 21 and have just actually started the process of looking for a 3 family home I am having a hard time getting started. I am finding "nice properties' and by nice I mean they look nice. And then I am finding properties that don't look so nice. From watching and listening to the podcasts they always talk about the "deal" and not always about how nice the property.  Finding a good deal that Is going to make you money is the key to being successful in this business according to many. They say using guidelines such as the 2% rule and 50% rule will help you filter through all the listings to find houses that you can look into further to see if they are actually  worth the time to go take a look at and maybe put an offer down. However since I have started I have not found ONE house that fits the rules. Is that because of my area, or are these rules of thumb something that just happen in a perfect world.

[Ned Carey]

The 2% test, is just a screening tool. A property doesn't have to meet the 2% test to be a worthwhile investment. Ones that do meet that test, will generally cash flow pretty well. Of course cash flow is not the only criteria for deciding on an investment. 

2% is a number commonly used here but you need to decide what number works for you in your market. Two present is to low in my market, I can do better with the quality of homes I want to buy. Some high income individuals may not care much about cash flow and may want real estate for other advantages like depreciation and appreciation. For them the 2% may be too high. 

You need to figure what percentage of rent to purchase price makes it worth you taking a closer look at a deal.

That said, new investors are often looking at the wrong types of properties or wrong areas. My guess is within 90 minutes of you there are suitable investments.