Real Estate Investor · New Orleans, LA · Member since 2016 · 95 posts · 5 votes
Hey Guys,
I've been reading some of the tips that the real estate guru @Brandon Turner has been giving and one of them is the 2% rule (The 2% rule states that your monthly rent should be approximately 2% of the purchase price. In other words, a $100,000 home should rent for $2,000 per month; a $50,000 home should rent for $1,000 per month).
I'm planning on investing in my 1st B&H duplex property within the next 3 months and I've been looking at property's and this rule seems almost impossible. Is there a certain type of property that I should be looking for? A fixer-upper, nice area, turn key...? How close do I really need to get to 2% to actually feel comfortable with a purchase?
Rents in our area average about $1 per square foot. That can vary up or down depending on the area, but that's the average. The only thing that matters for rental property is that it cash flows. Every investor has their own way of doing things and there is no hard and fast rule you have to stick to.
Turnkey is less likely. It will mostly be bank owned properties that may need some repairs with the majority of them being older and in less than desirable neighborhoods.
Rents in our area average about $1 per square foot. That can vary up or down depending on the area, but that's the average. The only thing that matters for rental property is that it cash flows. Every investor has their own way of doing things and there is no hard and fast rule you have to stick to.
I've been reading some of the tips that the real estate guru @Brandon Turner has been giving and one of them is the 2% rule (The 2% rule states that your monthly rent should be approximately 2% of the purchase price. In other words, a $100,000 home should rent for $2,000 per month; a $50,000 home should rent for $1,000 per month).
I'm planning on investing in my 1st B&H duplex property within the next 3 months and I've been looking at property's and this rule seems almost impossible. Is there a certain type of property that I should be looking for? A fixer-upper, nice area, turn key...? How close do I really need to get to 2% to actually feel comfortable with a purchase?
Thanks in advance
-Brandon
It's not that you buy a $ 100,000 home and rent it for $ 2000, but that you buy a house that rents for $ 1000 for 50K or a house that rents for $ 2000 for 100k.
The difference is that you buy the 100K valued house for 50K and not that you buy a 100K valued house for 100K and then expect it to bring $ 2000 in rent.
@Brandon Clark In the New Orleans area, the 2% rule is not possible. As @Braden Smith mentioned, rents are around $1 per square foot per month, with some of the nicer areas going above that. In New Orleans, its just not very possible to find a house that sells for $50/ft2 (which is what you would need for the 2% rule, given rent prices), unless its needs lots of work (which would need to be included in your costs).
Based on what I have seen, most properties can meet a 1% rule and still cash flow.
location location location! Rent prices are dictated in the most part by geography, block to block in some cases.In larger cities like NYC for example sqft rarely has the same impact on rent prices that its location does.
Just a quick caveat on the 2% rule - it's really more of a "Test." Does it pass the 2% test? Does it pass the 1% test? It's more about comparing deals within a market than defining a good deal. Like... in some areas, 1% is good enough. Other areas 1.5% is enough. Others 2%, or maybe 3%. It's just a quick gauge. In my market - I know that 1% is usually tough to cash flow unless the tenant pays all utilities and the house is newer (so it breaks less.) But if I see 2%, I can guess it might be worth looking into (and these are hard to find, mostly on small-multifamily.)
Do a quick forum search and you can fine a handful of threads on this topic.
From what I have read on here most people are closer to 1% than 2%. I feel you should also use the 50% rule which tends to be more true. Always run the numbers for the specific property. Then use the others as a check and balance. Make a list of repair and cost items and put it to a timeline. Check this to your reserve cash. This will help tell you if the property will fund its self. My place rents out for about $1 per sf and is at 1.5%.