# 2% test or the 50% rule?

3 Replies

It is clear that neither method is perfect, however we want our first investment property to mainly be a cash flowing property. Appreciation is great, but for a house hack, we came across a 2005 home that does not have as much appreciation potential as we would want. However, it is in a great location and is affordable. The listing is a 230k duplex and projected income of 1160. The PMI is 106. Given the 50% rule, this should cash flow \$474 clean per month (1160/2-160=474). However, given the 2% test, the numbers work out to 1160/230000= .005 or .05% (not good) So am I doing something wrong? This seems like a good deal but i'm not sure if the numbers are agreeing with me. Could someone help me with this dilemma?

Is the \$1160 for both sides or just one? You mentioned house hack, so I would assume you plan to live on the other side of the duplex and rent the other side. In this case it would be 1160/115000 = 0.01 or 1% for just the one side. Also I believe most people use the 50% rule for maintenance, capEx, insurance, taxes, property management estimate. The other remaining half of the 50% is what is leftover for the loan payment and then profit. So in your case 1160/2=580-106=474-loan payment=profit. Again, if you are going to live on one side, use half your mortgage payment for just the one side.

Ignore the formulae and focus on actual local data input. If it produces income and have reasonable cap rate that is what it counts.