CAP rate vs 2% rule

4 Replies

Does anyone know if 2% rule is the same thing as 24% cap rate?  Thank you so much!

Originally posted by @David Y. :

Does anyone know if 2% rule is the same thing as 24% cap rate?  Thank you so much!

It is not. 2% is one month rent ratio to purchase price. Cap rate reflects the ratio of NOI to purchase price.

I got it from the formula below:

Capitalization Rate = Yearly Income/Total Value.  So for example, I purchased a property for $100,000 and generated $24,000 per year, my cap rate is 24%.  Let say I purchased another property for $100,000 and generate monthly rent of 2% (2% rule), my yearly rent income is also $24,000.  This is how I gather cap rate 24% = 2% rule property.  Can someone help me to understand if this is correct?  Thanks a bunch!

@David Y.

Cap rate = Net Operating Income (NOI) / Purchase price. The 2% rule is based off gross rents.

In your example, you are using $24k NOI to get to a 24% cap rate and the 2% rule to get to $24k gross rents. Gross rents is pre-expenses and NOI is post-expenses. In reality, you'd likely need $50k ish in gross rents to achieve $24k NOI. Does that make sense?

Ah I see where I missed now! Thank you @Brandon Hall! So since the cap rate is pre-expensed gross rent and the 50% rule stated that 1/2 of the gross rent should be set apart for the expense, I conclude that 2% rule is about 12% CAP. Does this sound closer?

Join the Largest Real Estate Investing Community

Basic membership is free, forever.