When the 2% and 50% rules should be used or ignored?

Question

I have analyzed several homes using the BP rental calculator. Multiple times, I have had positive cash flow ($300/mo) and acceptable CoC ROI (5-7%).However, these homes have all failed the 2% (and 1%) and 50% rules. What am I missing?

Nicholas L. · Answer

@Ryan Worley you're not missing anything.  These are very, very general rules of thumb, and all they are meant to do is narrow a large number of properties down quickly.  You then move to a more detailed analysis.

Say you have 100 properties you're analyzing and you use the 1% 'rule' on them.  It leaves you with 17 properties.  Next, discard the rule and use more detailed estimates (which it sounds like you're doing).  Say that leaves you with 5.  Of those 5... you can then go even further.  Make sure the taxes are exact.  Find out who pays which utilities (landlord or tenant), etc.

Make sense?  It's just a screening rule of thumb meant to narrow a big list down to a smaller list.  It doesn't tell you whether 123 Main St. is a good deal or not.

Shannan L. · Answer

I only own 2 rentals so far, but I did/do not stress about any formulas that you see on here.  I was not overly concerned about cash flow (except that it must be positive after my expenses and estimated reserves), but was more focused on equity.  I calculate total ROI on my initial invested capital and calculate min/max sale date.

But if I needed cash flow, I would do things differently.  It all depends on what you are looking for in an investment.

Jay Hinrichs · Answer

those rules are totally out dated.. they were fine coming out of the GFC  but values have risen faster than rent..

not that you cant get those today you can if your willing to risk asset class and or you hunt for these on your own direct to seller.

Jay Hinrichs · Answer

Wow congrats  I have funded clients in some markets that have gotten close to that but its not a common thing I see

I just funded an 8 pack for one investor and I think out of the 8 one of them might have hit this it was a 3 plex.  for about 80k though..

Theresa Harris · Answer

You aren't missing anything.  Guidelines line the 1%, 2%, 50% are quick checks.  Run the actual numbers and do what works for you.

Jay Hinrichs · Answer

so 60k purchase for 1800 rents is that what you mean by 3% ???

When the 2% and 50% rules should be used or ignored?

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