2% rule seems excessive to a German

4 Replies

Hey everyone,

I just read about the 2% rule and I'm wondering if anyone can tell me why that even works in the US. So as you know, the 2% rule states that you should aim for a property that has a gross monthly rent of about 2% of the purchase price. Now that just threw my out of my chair, because I'm from Germany and over here that is an absolutely impossible return. Following the rule, you should get 2000$ in rent on a 100k apartment. Over here you are already getting a really good deal if you get 600€ on a 100k apartment. Now I'm wondering how real estate returns can be that different in two very developed countries. 

Does anyone have an idea? 

Thanks in advance for any replies! 

It’s possible to meet the 2 percent rule on a 100k house (if it’s small multifamily) but typically you’ll only see that rule met on lower end stuff.

I bought a property that meets this rule (although I didn’t realize it at the time) in Ohio. Cost 35k, rents for 750 and after the current tenants move out it should be closer to 800. Cash flow is 200-300 a month including debt service. Solid C class area.

Personally I probably won’t stack up on lots of these rentals but a couple may not be bad. The ease of managing my other rentals with B class tenants is so much easier. Sure I make slightly less return but the ease of management is great. I don’t want to have to track down 10 plus different rents every month as I scale. That’s a waste of time

It is different not only in every country it is different in ever region in every property class within a country. In Canada, which I am comfortable believing is a developed country, 2% can be very difficult to reach as well...........in many areas but it is out there you simply have to find it. Real estate investing is hard work beginning with the search for the hiddden gems.  

The rule is in fact a guide line to begin assessment. In some areas it is impossible to reach in the US as well where as in some it is a walk in the park.

Think of it as a guide line, a start point as a base standard and go from there. 

Real estate is all about location, location, location. Just like you can't say that 'America' has this and 'Germany has that'. 

I know there are regions in Germany where you can buy an 'Eigentumswohnung' for 15,000 Euro and can rent it for 300 Euro at least. Same in the U.S. It's not just city to city, but each neighborhood in each city has their own pricing. 

And it would be much nicer, if you actually used a name and not 'your mother' , which is sort of insulting, even if most people here don't know. 

5 years ago it was the 1% rule, now that prices are up it's the 2% rule?  
When prices go down will it be the .5% rule?   How does this make sense?  It doesn't.
And, who really cares what the gross is - it's the net that actually matters.  

Your gross rents could be 10% monthly - but when it nets out you could still be negative! The bottom line - gross means nothing when it comes to money in your pocket.

You can use these rules as one of many factors to help you make a business decision, but the "x% of gross" shouldn't be considered a hard and fast rule.  

Every deal is different, and every investor's strategy is different, so in my opinion, living by a such general rules based on gross income is not a wise practice.   

Determine what works for all aspects of your deal and go with it.