2% Rule/Test

6 Replies

Hello fellow Real Estate Investors!

I was trying to wrap my head around the 2 % and how I can figure out which percentage applies to my market but now that I was testing the BRRRR Calculator I've gotten more confused, because it explains the rule as being "Income-Expense Ratio" opposed to "Monthly Rental Income-Purchase Price", as I've seen in many places. Does anyone why is this?

I've read this article on the rule, (https://www.biggerpockets.com/renewsblog/2013/04/1...) which explains it pretty well but I still I don't know what number applies as a screening tool for my market. I'm pretty sure 2% is impossible to hit in my location, which is highly overpriced right now, but how can I know if I should hit 1% to even consider buying it? I don't have enough experience to know the difference between a good and a great deal.

For example, my first and only deal was all cash (which now I'm looking to refinance), and the total invested capital was 91,171.00€ with a gross annual cash-flow of 5520 €, so that gives me a COC return of 6.05%.

Is this bad? 

Of course, when I refinance this property and only have about 20% of invested capital in it this number will be much higher but that doesn't affect the 2% rule/test at all.

Cheers! = )

@Account Closed , most BP members would suggest you should be investing for more than just 6.05% annual return on a $91,000 outlay. It seems to only make sense if you're ALSO expecting a significant appreciation in its value. Has that happened?

Next, what will happen to its cash flow when you pull out 80% of its value? Still positive?

Nope. Why? Because its 80% mortgage will cost over $6,000 per year = more than its cash flow!

That's why any investment that gets less than 1%/m gross return is VERY hard to cash flow positively while you're trying to leverage it highly as well!

But the answer is NOT: borrow less. The answer is: find BETTER deals! Cheers...

@Brent Coombs Hello Brent!

So yes, the house had a significant appreciation, because of my rehab and also because of the market itself became more expensive over the last two years. I can probably sell it for 120K today; so I have extra equity on the property as well as the 6.05 % COC. Another thing is, in January, when my tenants leave, I'm going to do a little improving on the house and I can probably go from 5520€ to 6720€ (net profit per year) by bumping up the rent 100 €/month.

From the credit simulations I've done the mortgage will not cost that much. Worst case scenario I can get a 3% interest rate at 40 years. I already talked with three banks about this. So it will cost less then 4k per year.

But I definitely agree with you. I do need to find better deals! I didn't know what I was doing very well when I bought this property but I've been reading a lot and I will do all the math and find a better deal for the next one.

Thanks for the advice. Really appreciate it!

Wow! 3% x 40 yr fixed INVESTMENT loan! Never heard of THAT one! (And that's "worst case"?)

Use them WISELY! Congrats on the appreciation though, so far. Take a bow...

@Brent Coombs

That's common credit here in Portugal nowadays. There's a regulating tax called Euribor which determines the interest for inter-bank loans in the European Union; and this tax has been really low for quite some time, manly because of the financial crisis of 2008. This tax changes every day and the mortgage interest can actually change accordingly every year, which can make a 200€ monthly loan become a 300€ monthly loan. Don't know if you have something like that in the U.S...

Do you think I should sell this house and try to get my next deal with a better price-to-rent ratio instead of financing this one? I've considered this because here the market is inflated and in a year or two it might not be anymore and then I might not get the same profit from the sale if I want to sell it.

@Account Closed , aah, so NOT "fixed"! I'm in Australia, so I know all about that!

You seem to have good instincts. Go with what you and your family are comfortable with. Cheers...

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