Interior Decorator · Chattanooga, TN · Member since 2018 · 31 posts · 21 votes
I've been scratching my head at this 2% rule of thumb to determine the rent price of a property. I know it's more of a guideline than a rule, but I just don't understand how I could get away with charging $6,000 a month on a $300k house, which is the average price in my market. Houses in that price range rent around the $1,500 - $2,250 a month, which makes more sense to me. Can someone tell me if I'm missing something to this 2% rule??
Hi Ellie, the 2% rule does not work in most markets. especially not in most appreciating markets or single family homes. It works in mid america where you can buy a duplex for 70k and rent each side for $700. Or in rust belt towns where you can pick up a quad for 100k and rent each apartment for $500. It is not meant to tell you how much to charge for rent. It is meant to help you filter your searches as you canvas the country. I've never had a deal fit the 2% rule and not cashflow nicely. Hope that clears things up a bit!
As an example check out this one i found just now on zillow: https://www.zillow.com/homedet... it is actually closer to a "4.6% Rule Deal".. Good luck
Hi Ellie, the 2% rule does not work in most markets. especially not in most appreciating markets or single family homes. It works in mid america where you can buy a duplex for 70k and rent each side for $700. Or in rust belt towns where you can pick up a quad for 100k and rent each apartment for $500. It is not meant to tell you how much to charge for rent. It is meant to help you filter your searches as you canvas the country. I've never had a deal fit the 2% rule and not cashflow nicely. Hope that clears things up a bit!
As an example check out this one i found just now on zillow: https://www.zillow.com/homedet... it is actually closer to a "4.6% Rule Deal".. Good luck
All these rules and strategies BP pushes are marketing noise more than anything else. They're not a 1 size fits all approach by any stretch.
A lot of them were also thought of coming out of the great recession when houses were going at fire sale prices and people thought they were smarter than they actually are because they picked them up at such low prices.
If it feels right to you, works for you financially, pull the trigger on it.
2% rule homes also usually mean you'll be spending a ton of time managing them (evictions, repairs, etc...). Everyone's situation is different. In my area, using rentals to build equity in an appreciating market is a good strategy. Cash flow is slow at first, but after a few years you make it up. Just depends on the market.
Lots of markets can't hit 1% these days, let alone 2%!! It's just not happening at a large enough scale to be relevant. In 2016 I was seeing MLS deals in Connecticut at 1.4-1.6%. Now it's 1.2-13% on a good day. Things have changed, and it's up to us to keep moving with the times @Ellie Ryan.
How's the snow up there, btw? I saw you guys got pummeled last week!
Lots of markets can't hit 1% these days, let alone 2%!! It's just not happening at a large enough scale to be relevant. In 2016 I was seeing MLS deals in Connecticut at 1.4-1.6%. Now it's 1.2-13% on a good day. Things have changed, and it's up to us to keep moving with the times @Ellie Ryan.
How's the snow up there, btw? I saw you guys got pummeled last week!
One things for sure, change is the only constant in our lives. And sure did! Power went out for close to 80% of the state. We were fortunate enough to have our backup generator kick-in.
All these rules and strategies BP pushes are marketing noise more than anything else. They're not a 1 size fits all approach by any stretch.
A lot of them were also thought of coming out of the great recession when houses were going at fire sale prices and people thought they were smarter than they actually are because they picked them up at such low prices.
If it feels right to you, works for you financially, pull the trigger on it.
The 2% rule isn't really a reality. Some people use the 1% rule, but frankly, it is overly simplistic. It only looks at the top line. What about all the other expenses associated with a property? Net is what matters, not gross.
If all I could get is the 2% rule I wouldn’t even buy it , 1% there’s just no point unless you live in San Francisco or Dallas Denver etc and crossing fingers for appreciation . I get 3-4% rule pretty regularly and would not get out of bed for 100-150$ cashflow but to each their own . I invest in the Midwest and like my cashflow . I generally buy livable homes for 7-10k and rent for 550-650 a month .
A lot of the time you get to 2+ % by holding long enough. When i bought my first rental in 2016, i was collecting $2,000 on a $225k house. Its worth $330k today 4 years later. My mortgage is $1,380 and im collecting $3,600 in rent.
Just buy in an area that appreciates in terms of price but also rents going up. Its hard to mess up real estate if you are in a food area. Hold long enough and the house turns out well.
I guess I kinda learned that the 2% was a very strict rule of thumb that isn't a clear cut buy/dont buy signal. I have however learned that you need to account for vacancies/repair in your budget costs or you could end up underwater and the property is not really cash flowing. I guess as long as those expenses are covered it could be a good investment.
@Nam Trang your looking under the wrong market or managing incorrectly if you really believe that! 2% rule and way above is hit every day in the Midwest and it does mean more repairs and evictions!
Good evening Matt, those are outstanding numbers. What city and state are you buying?
Hi Marcello,
Thanks!!! I try to go with quality over quantity. I invest in Orlando FL just south of the city around Disney World. Are you an OOS investor? I hear Cali is pretty strict on everything right now.
Thanks for the intel Matt. Yes I am an OOS investor. I’ve been for a few years. I have been doing pretty good in Kansas City, Mo but it’s way more expensive now. The numbers don’t really make as much sense unless you start moving into the ghetto. I am looking at finding a new area that has a strong tenant base with pretty good cash flow. My brother and sister-in-law just bought a very expensive duplex in Tampa and was shocked at what they were getting for rents. Same as you ($3,500 a month on each unit). They looked into Orlando Florida and said it was a great market but found a better deal in Tampa. They didn’t say Orlando was off their list. I looked into Orlando and it’s pretty expensive but strong economy and high rents so it balances out. Any recommendations on where around Disney World I should look? In Missouri it’s all by zip codes. Idk if it’s like that in Orlando.
2% rule? What is this? I remember the old-timers talking about such a thing, but I don't know. Seems like believing in believing in VCRs now.
Kidding aside, even moderately interesting markets can't get 2%, most can't get 1%. And if you're in a market like Denver or Colorado Springs where we work, no one abides by that because that would mean never buying anything.
I get wanting cash flow. That's smart. We aim for it, even modest cash flow, in everything we buy and that our clients buy. But ignoring appreciation is foolhardy in my book. If you bought stock in Netflix at the dawn of the streaming age, you didn't hear people say, "Well, you can't count on appreciation." Sure, nothing's guaranteed, but you can look at an asset and have a sense of where it might go.
In Denver and Colorado Springs, we see a diversified strong economy (Covid notwithstanding), a relatively low unemployment rate, an attractive quality of life, a vibrant city attracting young people, new companies and tons of leisure activities. Those add up to a city that with strong prospects for future growth. I'm not saying bank on 12% appreciation (which we had this year), and I'm not saying buy a lemon that is $500 cash flow negative. But I am saying don't ignore a huge aspect of the wealth-building power of real estate.
@Ellie Ryan like others have said, in today’s market it’s very hard to find a 2% property unless you want to buy in a war zone. I bought a handful of properties that were 2%+ about 4 years ago. Now when selling them, they’re selling closer to the 1% range for the new buyer. It was a good way to screen out properties right away that don’t make sense but still make sure you’re running all your numbers on the property before buying.
I hardly use any of these % rule of thumb. Thought some of them have meet these "rules". It also depends on the strategy. For example, I don't buy in any market and I will expect them not to be up there with any of these rules in the locations I'm buying. Not saying there are not available thought, but it may take you way more time to find these specially with this crazy season with lack of inventory and multiple offer scenario (seller's market).
In my market, the 2% rule is still alive. However, I usually don't get 2% at purchase because I avoid areas where that is possible. I do find properties where I know I can put in a small amount of reno money and then turn the property into a 2% deal with increased rent.