The 2% Rule in Today's Real Estate Market - Is It Still Relevant?

Question

Hey BP,

As we know, the 2% rule is a widely used guideline in real estate investing, which states that the monthly rent should equal 2% of the property's purchase price. This rule is often used as a quick way to evaluate the potential cash flow of a rental property.

However, with the recent changes in the real estate market, many investors are questioning whether the 2% rule is still relevant. On one hand, rising home prices and interest rates are making it more difficult for rental properties to meet the 2% threshold. On the other hand, the strong demand for rental properties in many markets is leading to higher rents, making it easier to meet the 2% rule.

So, is the 2% rule still relevant in today's market?

Jaron Walling · Answer

**Raises hand in the back of the room**

We purchased on/off market cash-flow properties in C/B- neighborhoods for the last 5 years, and exactly 0 opportunities met the 2% rule. It's not impossible but it's extremely challenging to find. It's not a relevant in today's market.

Joe Villeneuve · Answer

The 2% rule was never relevant except on milk cartons...and it's still relevant there

Chris Martin · Answer

To clarify, investors in the Raleigh area like me used the 2% Rule of Thumb mostly after the Great Recession when the market had collapsed, and C-D type cheap properties were everywhere but still risky to acquire because of market valuations and tenant quality. About a decade ago I authored this post, Thinking of an investment in a hedge fund?, that detailed some of the relevance of the 2% rule of thumb. One post that stood out back then that is applicable now:

"The 2% rules only applies to people like us who actually need to make a decent profit on these things. And, even then, the 2% rule actually only applies to the low end homes. When you start getting into the 90 to 120k price points and above, you are going to be incredibly hard pressed to even touch the 2% rule." by @Mike H.

Think about it. Back then, my typical acquisition (and probably Mike's) was a $55K-$75K SFR that I would rent for $900 to $1000 a month. I could hit the 2% on townhouses and condos. It wasn't that easy on SFR properties, but I did have a few.

In the current market, the 2% Rule of Thumb has limited applicability.

Dan Rowley · Answer

It's antiquated IMHO.  if you find something @ 2% rule today there is something seriously wrong with it I'd say.

Cory J Thornton · Answer

@Wes Reed - To me one of the determining factors seems to be whether or not the asset is expected to ever appreciate. In a strong market like Raleigh, you are doing well to find anything on or off the market that hits a 1%.

I have a few people I know who will pay cash for single wide trailers in the country. This locks up capital, and is much less liquid of an investment. When someone puts $40-$50k into an off market single wide trailer, then the game has nothing to do with a BRRRR or planned appreciation, it is all about how fast will I get my cash back. I know a few guys who take this investing approach and they don't have a problem hitting and beating 2%. That's a very specific part of REI and I haven't seen it done on scale ... outside of that one play, I'm not aware of anything that consistently hits at 2%.

If you are willing to consider markets like Wilson, Rocky Mount, Henderson, or Fayetteville you can find some extreme value add properties that when finished will net a higher return than Raleigh ... but that's the risk reward ratio coming into effect.

Jason Hirko · Answer

In my experience, the 2% rule hasn't been a thing outside of C- and D class properties for years. Today's market has little to do with it.

Andres Murillo · Answer

Not at all.

It hasn't been for at least the past handful of years. Unless a market is dying - talking single employer towns where that employer has left type of dying - you really won't find it.

Anyone marketing a property with that type of rent/price ratio is selling a giant PROBLEM.

Jose Bernard · Answer

I haven't come across a deal that meets the 2% rule in a long time. I invest in C and B- neighborhoods and the best I get to see is around 1.5%, but the average is closer to 1%.

Wesley W. · Answer

Here in NY, many properties will not cash flow at the 1% rule due to high taxes and other expenses.  The 2% rule worked at one time, but it's no longer viable in this market. I look more closely at anything above 1% and see if there is a value add opportunity to bring it into a reasonable yield for the risk.

The 2% Rule in Today's Real Estate Market - Is It Still Relevant?

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