2% rule, do people really use this?

General Landlording & Rental Properties
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2% rule, do people really use this?

Ellie Ryan
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??

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Victor SteffenBusiness Member
Investor · Austin, TX · Member since 2017 · 352 posts · 374 votes
5y

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

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  • Jennie Kesselman
    Realtor · Connecticut & Massachusetts · Member since 2020 · 25 posts · 7 votes
    5y

    @Victor Steffen Now you just have to swoop that deal up before all the others investors on the forum, LOL.

    0Reply
  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    5y
    Originally posted by @Account Closed:
    Originally posted by @Peter Tverdov:

    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. 

     Do you think they are smarter now paying non-fire sale, absurd prices? 

    The people going in cash flow negative for years must be geniuses. 

    I don't know anyone going in cash flow negative but frankly I get sick and tired of people contacting me on here asking if they can buy a BRRRR property or a 2% deal because they read an article @Brandon Turner or a mod wrote 5-10 years ago. BP in the last 2 years has totally shifted their approach in what this site is about and it's evident because I get nothing but newbies asking me absurd questions like this (not directing this at OP, just lurkers in general).

    There is no math equation to buying a rental, no matter how often Biggerpockets writes a blog post telling people there is or how hard their push their calculators, books etc. I have had clients who want to 1031 exchange, I have had clients who are unwinding a stock portfolio or taking money from their 401k to hedge. A million reasons to pay X price for a house. Not just "herp derp, 2% rule"

    /rant

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  • Matt Tobler
    Minneapolis, MN · Member since 2017 · 37 posts · 13 votes
    5y
    Originally posted by @Dennis Wayne:

    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 .

    Thats awesome! 

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  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    @Matt Tobler

    Ha ,I’m not missing out on anything , a house is just 4 walls and roof I’m concerned with the income in generates not the asset class or building or neighborhood.I can buy my houses in cash and get 300-400$ in cashflow . . Why would I want to go in a nice area and kiss a banks butt to be leveraged with a 150k loan for a pretty house and add risk to my situation ? When you buy at lowest prices like 7-10k for a home the bottom can’t go lower and it’s easy to calculate .sure you don’t get appreciation but I can easily make up for that in returns .

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  • Tyler Paquette
    Realtor · Chelmsford · Member since 2020 · 9 posts · 2 votes
    5y

    @Dennis Wayne

    7-10k move in ready?

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  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y
    Originally posted by @Tyler Paquette:

    @Dennis Wayne

    7-10k move in ready?

    Yes , completely livable and often there’s a tenant in place already . Now that being said ,sometimes I will take the ugly off them and have my handyman do a few cosmetic things though and that’s typical no more than one thousand . You would be shocked in many cases I bet of what 10 grand can buy ,I once bought a really nice 3 bed on a good street with a big yard and garage ! for 5500 , I sold it a week later for 40k and never did a thing to it .. now that was exceptional 

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  • Nate Sanow
    I​nvestor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    I've seen 2% opportunities in my market but they do tend to be C class.  1.5% plus minus is a remote possibility in some B class areas.  Also in my market I would tell people who want to invest to target 150k or less on their all in purchase price, which is also to engineer the 1% + opportunity for them.  That is knowing a majority of our rents are sub $1500 per mo.  

    I've noticed the more expensive the housing, the worse the ROI for the investor on a rental. Sounds like a contradiction I know, and some exceptions apply of course such as STR etc.

    1Reply
  • Laura Williams
    Kansas City MO · Member since 2014 · 357 posts · 349 votes
    5y
    Just my 2 cents: Obviously the more cashflow & higher rent to price you get the better...everyone would agree here. But I think that times have changed and the 2% rule isn't realistic in most markets anymore. That worked a few years ago really well for some people after the RE crash but it's outdated advice now. Now days I think the golden opportunity is in getting really cheap mortgages. My friend just got 2.5% rate on a second home fixed for 30 years. His monthly payment for a 320K loan is about the same as my loan (with higher interest rate) is for a 200k loan.
    1Reply
  • James CarlsonBusiness Member
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    5y

    @Laura Williams

    That is a great point about the interest rates. People worry about prices going up, which they should, but you can also get quite a bit more house with those low rates.

    As an example, I ran some numbers on a $450,000, 3br/2ba home in our market. (That's pretty standard  home now in Colorado Springs, and a still-attainable home in certain areas of Denver). I looked at the effects of a 2.5% interest rate and 4.0%. (The latter is a rate we had until recently on a home we bought five years ago.)

    • At 2.5% interest, the all-in mortgage/PITI (principal, interest, taxes and insurance) would be $1,587. 
    • At 4.0% interest, the all-in mortgage/PITI (principal, interest, taxes and insurance) would be $1,865.
    • So a $300 difference in monthly payment. 

    To put it another way, if you wanted to keep that $1,587 payment but rates were at 4.0%, you'd only be able to afford a $385,000 home. That's a $65,000 loss in buying power.

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