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.