2% Rule seems crazy on this one...

34 Replies

Here's what I read on the 2% rule.....

"The 2% rule says that for a rental property investment to be “good”, the monthly rent should be equal to or higher than 2% of the purchase price."

so....

If I bought a multifamily property at 400K I should receive a rent roll of 8k (2% of 400k) monthly in order to be a good deal? Really?

Somebody help me with this. Say it ain't so.

Billy T

Billy,

Yep. 

However, remember that that is a screening rule, not a "buy" rule.

The only way to actually determine if something is a "buy" is to do a complete financial due diligence analysis on it. You then compare the analysis to your business plan to determine if you will purchase it.

Hope that helps.

Good luck,

Jim

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Why are you using the 2% Rule?  What is it telling you if the Rule works?  What does it tell you if it doesn't work?

The 2% rule is good for low end cheap properties...like a $40k property rentong for $800 a month. The rule does not hold up as you move up in price point. Obviously no one is paying $8k a month to rent a $400k property.

@Bill Thomas - I tried to hold on to a 1% rule in Austin and had an extremely difficult time.  I ended up purchasing a duplex for $435k that brings in $3200 in rent.  I didn't meet the 1% but quite a bit and I am paying for it with undisclosed expenses that would have been better covered from positive cashflow.  

@Bill Thomas You'll see a ton of rules everywhere, just as often as you see a "2% rule" referenced you'll see a "1% rule" referenced.  Both are really saying the same thing and some of it is a reflection of the time (2017 vs. 2008 for example) and some of it is a reflection of the location (Dayton, OH vs. San Francisco, CA) and some of it is a reflection of condition (2017 build vs. 1942 build).  I'm sure I could come up with some other variables as well.  

I could buy something 50% under market where I live and I'm not sure it would even make the "1% rule".  But I'd still buy it...and it would be a good deal...

@James Piercy I don’t find that much down there meets that rule anymore. In Minneapolis and Louisville I’ve had good luck.

In northern California the avg (not median) home price is 1.5M you will be lucky to get $6500 for your rent.  Take SF City the rent asked is $10K for a $1.8M older Victorian. Viewers balk at it thinking it should be way lower. Three months later it is still on the market.

It is not % Rule that matters. Cash flow. Are you operating on positive, break even or negative cash flow? How much Hillary Clinton Chappaqua can rent for? 

The origins of 2% concept were born out of mobile home investing. There it really makes more sense as one would find that number relative for comparisons. Perhaps the sub 50kers could also find some use for it. Otherwise for most residential it is not a rule that is taught formally or found in textbooks etc. The reason why I suspect it is not taught, it is not considered a reliable metric to predict future profits. 

Two homes 100k each example. 

One is 1% and one is at 2%. 

The 1% five years later doubles in value, rents double and has no vacancies. It just so happens this location got annexed by the top school district in the state, county, city....Rents are now 2%. 

The 2% five years later, no value increase, rents went down 10% and has 15% vacancy. It just so happens this location is becoming gang invested, hard to rent, multiple evictions, 7k in turnover cost and schools just got taken over by the state for corruption. Rents are now 1.8% ...when you can rent it. 

 Good luck! 

@Russell Brazil is exactly on point, 2% rule works when the properties are cheap cheap cheap.

The rule stems from the belief that (a) half of gross rent will go towards expenses, and (b) .6-.7 of the rent goes towards the mortgage payment. 2%-1%-.7% = .3% monthly profit.

It's a very conservative formula, but just explaining why some investors stick to it.

Just remember " rules are meant to be broken "

You have to do what works for you 

As with any of these rules, it's a "rule of thumb"-- not a hard and fast rule.  There are a lot of variables to put into play based on your investment goals.   Once you start analyzing properties (to practice, or while earnestly looking), you'll start to find the trends for what makes sense for you and your personal investment goals and comfort levels.  

I have found nothing of any kind of authority that mentions a 1% or 2% rule when measuring a good deal.  That doesn't even sound like it would make sense.  I see it all over BP, but everytime I see it referenced, I scratch my head and wonder who started whispering it in people's ears on here like a bad game of telephone.

I can see how it would be useful in a mobile home park, or even storage facilities, but not residential.

Thanks James. So this property has the potential to bring in a rent roll of about $4k monthly. If I finance the property, mortgage payments with taxes and insurance will be roughly $2,900.

The deal seems reasonable....am I missing something? Please fill in the blanks for me anyone?

Thanks everyone for the much-needed discourse around this rule. I now have a new perspective....

I’ve bought a 1 percent property and. 2 percent Property. To this point I prefer the 1 percent. Nicer neighborhood, nicer house and it’s been truly hassle free so far

These are rules of thumb not absolutes

I've tried to obtain the 2% rule within my portfolio but even with me doing all the rehabbing outside of the licensed areas the best numbers I've been able to reach are a 1.6%.  With this being said I'm still profiting 200+ per door on every property which is higher than what most people mention in any of the podcasts I've listened to.  Out of all my units I've only had 1 month of vacancy on one property in 2.5 years and I ask for top market rates.  A lot depends on your finishes and locations.  Don't let any rule of thumb dictate what you should and shouldn't buy.  In my location I find it hard pressed to drop below the 1% but again that's rule of thumb.  I could reach the 2% if I were to stretch out my financing but I don't do typical financing rather commercial lending which only allows me a max of 20 yr notes.  Hope this helps you.

That rule just shows the 3 rules in operation,  that if you get 2% you are not in a good location

I prefer the 50% rule.

I agree with the things that have been stated already.  I think that the 1% or 2% rules that have been mentioned in podcasts or posts are meant to be a screening tool in order to look into a property deeper.  But properties should not be purchased or ignored on the screening tools alone.  I think having these guidelines are helpful especially for the less experienced investor in order to help them minimize loss and avoid getting into bad deals.

Guys it shouldn't be called the 2% rule. Its a concept that only applies to low value properties. If you are talking a sub $100K property then break out the "rule." Otherwise look at the deal in front of you. If it makes sense and you want it . Buy it. 

Jordan - you have had good luck with the 2% rule in Minneapolis? Wow - I’d like to know how you find those. Every investor I know here would be very happy to find something that does even close to 1%!

@Mark S. 1% or very close is possible on large duplexes in Minneapolis & St Paul.  I feel you need 5 or more bedrooms combined. 

Location, Price with Rehab, Gross rent

E StP - 169,000 - 2,195

S MPLS- 285,000 - 3,045

NE MPLS- 325,000 - 3,095

SE MPLS - 309,000 - 3,800 (SFR)

NE MPLS - 350,000 - 3,755 (Estimated rehab in progress)

Lauderdale - 296,000 - 3,650 (Estimated light rehab in progress)

These were all purchased within the last 16 months, All but 2 were found on MLS.

~Tim

@Mark S. I haven’t in areas that I would invest in. I’ve seen the 2% rule work on section 8 properties in North Minneapolis but that’s about it.

The stuff I’m looking at is still hitting the 1% rule or above and is in nicer neighborhoods.

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