Regarding the 2% rule. It seems unreasonable in my market.

Syosset, NY · Member since 2017 · 2 posts · 0 votes

Hello,

I am looking to purchase a house on Long Island, NY. Potentially a multi-family where I would live in half of it. I have been listening to the podcasts and they keep mentioning the 2% rule where each months rent is 2% of the total cost of the house. If I bought a house for $400,000, I think its entirely unreasonable to get anywhere near 2% of that per month in this area. $8000 a month for a mid-size house seems insane. I think the most i've seen similar houses go for is around $2500/3000/month. But then this violates the rule by a wide margin... does that mean I should not bother even renting on LI?

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Mindy JensenPro Member

BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes

Most "rules" in real estate are actually Rules of Thumb or rather, a guideline.

2% is awesome, but practically nonexistent in this market in most of the country.

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Dustin Beam
Kansas City, MO · Member since 2015 · 609 posts · 321 votes
9y
I think (not know) that the 2% rule came about after real estate crashed and it was an achievable number. It still may be in some areas, but from what I see in KC (supposed affordable market compared to other markets) and what I read here, 2% rule is a tough number to hit unless it's in really rough neighborhoods.
But, I have doubts it's possible to get those properties, but they aren't everywhere.
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Dylan Boesch
Flipper/Rehabber · Long Island, NY · Member since 2014 · 24 posts · 6 votes
9y
no you should absolutely still consider it, there are thousands of homes being rented on long island, they cant all be making bad deals -
there are a ton of income metrics and ratios to use to determine a good or bad deal - if you are holding the property you are likely going to finance it, so Cash on cash return is a good metric to use.
$400k x %20 = $80k down payment to close (ignoring closing costs and repairs)
Now its up to you to figure out the expenses of the deal, including your mortgage payments. lets say if you are renting for $3000/ month, its not unreasonable to assume you could take home $1k per month after expenses (I am simplifying dramatically for time's sake).
$12k gross for the year on a $80k investment = %15 cash on cash in the first year if everything goes perfectly.
-----dont forget your income taxes depending on the tax bracket you are in---
There is plenty of opportunity on Long Island!
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Jim Adrian
Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes
9y
@Chris G.
2% doesn't work in all areas of the country from what I read on here. You are better of to use it as a guide for checks and balances. I hear a lot of people are more around the 1% range and above. I would also use the 50% rule (guideline) as well. You need to look at the numbers in may different ways for a check and balance approach. You need to establish what is acceptable to you. Is CoC % important or is it profit more important.
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
Most "rules" in real estate are actually Rules of Thumb or rather, a guideline.
2% is awesome, but practically nonexistent in this market in most of the country.
[email protected]Podcast Guest on Show #261
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Chris G.
OP
Syosset, NY · Member since 2017 · 2 posts · 0 votes
9y
Originally posted by @Dylan Boesch:

no you should absolutely still consider it, there are thousands of homes being rented on long island, they cant all be making bad deals -
there are a ton of income metrics and ratios to use to determine a good or bad deal - if you are holding the property you are likely going to finance it, so Cash on cash return is a good metric to use.
$400k x %20 = $80k down payment to close (ignoring closing costs and repairs)
Now its up to you to figure out the expenses of the deal, including your mortgage payments. lets say if you are renting for $3000/ month, its not unreasonable to assume you could take home $1k per month after expenses (I am simplifying dramatically for time's sake).
$12k gross for the year on a $80k investment = %15 cash on cash in the first year if everything goes perfectly.
-----dont forget your income taxes depending on the tax bracket you are in---
There is plenty of opportunity on Long Island!
Thanks for the info Dylan. As you probably already know, taxes on long island are some of the highest in the country. Easily 10k in a decent area. Which again makes me doubt the feasibility of profiting from renting on LI. However, I am not necessarily looking for monthly profit here as much as I am an investment that is paying for itself. But at some point I'd like to buy a second home for rent as well, not sure I would be able to come up with that kind of money if I am not making a profit on my first home.
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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
9y
As you move up in price point, the ratio needed to cash flow decreases. Think through the logic a bit. Say in a $50k house that rents for $900....in order to do even minor repairs takes up a large percent of the rent. But if you move up to say a $400k house that rents for $3,000....the same repair will take up a much smaller percentage of the rent. So as you move up in price point, often though not always, your repairs and cap as become smaller percentages of the overall rent compared to cheaper properties.
My typical rentals are in the $400k to $450k range and rent for $2500 to $3200 a month, and I do just fine. (Tax rate of around 1.2% of properties value)
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