2% Rule seems crazy on this one...

Real Estate Investor · Mamaroneck, NY · Member since 2015 · 20 posts · 4 votes

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

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

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.

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Jeshua Patrick
Rental Property Investor · Charlotte, NC · Member since 2017 · 298 posts · 232 votes
8y
I am in the Charlotte, NC market and it’s so crazy here that if you buy in good entry level areas (think C+, B-) at 70% ARV all-in it’s hard to get 1-1.2% but you could potentially have 50-100k equity right out the gate. My question is, even though I want to buy and hold, would it be better to acquire break even deals with the intent to rent them until I’ve met the 1031x requirements, then exchange them into a small MFU in the 16-20 unit range or even another similar equity play or am I just playing with fire? The other option is to flip them, pay the tax, and take the profits to build my cash position until the market corrects, assuming it does.
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
For me, when good cash flow properties aren't available the answer isn't to buy properties in the hood to get closer to 2% rents. The answer for me is to look somewhere else completely. That's why I left MA.
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Brian Garrett
Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
8y
Originally posted by @Jeshua Patrick:

I am in the Charlotte, NC market and it's so crazy here that if you buy in good entry level areas (think C+, B-) at 70% ARV all-in it's hard to get 1-1.2% but you could potentially have 50-100k equity right out the gate.
My question is, even though I want to buy and hold, would it be better to acquire break even deals with the intent to rent them until I’ve met the 1031x requirements, then exchange them into a small MFU in the 16-20 unit range or even another similar equity play or am I just playing with fire?
The other option is to flip them, pay the tax, and take the profits to build my cash position until the market corrects, assuming it does.
I would BRRRR them and have cash flowing properties with no money into the deals since you want buy/hold anyways.
You'll have continuous cash this way to keep buying more properties. Then eventually you can 1031 and move to MFR.
Otherwise I would flip them and build your cash position as a secondary option. Definitely wouldn't let them go though!
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
Something to keep in mind of buying properties that don't cash flow is you are likely increasing your debt:income ratio and won't be able to get financing after a few of these purchases (depending on how much other income you have).
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Jeshua Patrick
Rental Property Investor · Charlotte, NC · Member since 2017 · 298 posts · 232 votes
8y
I guess I should have been a little more clear. The SFH’s I was referring to that were 1.0-1.2% deals at 70% ARV all-in are often break even cash flow deals at best due to the extreme rise in values over the last few years.
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
@Jeshua Patrick How many of these would you like to be able to purchase, and how many could you actually purchase before you reach a debt:income ratio that could prevent you from financing more?
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Jeshua Patrick
Rental Property Investor · Charlotte, NC · Member since 2017 · 298 posts · 232 votes
8y
Eric a lot of that depends on the lender. I have one lender that will give me credit up front for 75% of the expected rent towards my DTI. I can increase the number of units by buying 2-4’s conventionally and those will likely offer better opportunities at cash flow currently. On market and REO SFH’s are what is really insane here at the moment.
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
I mean, best lender and best case scenario?
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