Does the 2% rule work most of the times?

Question

Hi - I am new to rental investments and came across the 2% rule (monthly rental should be 2% of the purchase price). I am looking to buy and hold condos (greater Cincinnati area). In my area, condos prices are generally $150k-$175K and they generate rent between $1700-$1800 per month. Based on the 2% rule/guideline, the rent should be in the $3000-$3500 range which doesn't seem feasible. In such scenarios, is it ok to consider the rental property even if it can't satisfy the 2% guideline?

Thanks in advance.

Parag

Thanks in advance.

Parag

Kenneth Garrett · Answer

@Parag Doshi

Those percentages of 1% and 2% are only guides they do not insure anything.  Run your numbers each time.  Use current data for calculating rental amounts in your area.  I use Zillow, Rentoneter, Apartments.com, trulia, hot pads, etc.  Make sure you are comparing similar neighborhoods.  There can be a dramatic change in rent from one neighborhood to another. Different quality of schools, taxes, crime, etc.

Good Luck.

Stephen J Davis · Answer

Trust the comparable rents and don't use a rule. Plus, you should not be paying full price for any rental that you buy. Take a course on real estate investing before you move forward. Good luck.

Stephen J Davis · Answer

@Parag Doshi There are quite a few good ones out there. Go to www.nationalreia.com to find a real estate investor club in your area. Then join and ask about local mentor groups and courses. If you are in TX check us out. www.getrealwealth.com.

Ron Rohrssen · Answer

@Parag Doshi I agree with @Kenneth Garrett. Use the a percentage rule as a guideline. It's a quick rule of thumb to see if a property is reasonably priced to cash flow as a rental. In my area, I use 1% for that quick test. Then, like Kenneth, I run the numbers using online information that includes comparable rents (Rentometer), current tax information, bedrooms, bathrooms, square footage, and a judgement call on the appeal of the home from online photos. If those seem workable, I'll schedule a viewing. Remember, you're working a funnel. You might have 100 properties come across your desk in a week. 50 pass the 1% rule, 15 pass the high-level number evaluation, 10 make it to a viewing, and 1-3 result in offers.

Michael Peters · Answer

If you can make the 2% rule work you're pretty much guaranteed to make money on the property, but it isn't a reality in most parts of the Country.  It can work if you're buying properties under 100K that require a lot of work and willing to put in the effort.  Most places in the country are currently looking more at the 1% rule.  Everything is market specific.  Make sure your analyzing enough deals in the area until you get a good grasp of the market.  In Iowa I look for anything that can beat the stock market average as a fantastic opportunity.

Mayer M. · Answer

@Parag Doshi

I’ve used this rule before, but don’t anymore. I’ve had 2% deals work and not work. Now I’m doing a deal that is about 1% and the cash flow is better than my 2% deals

Matthew Irish-Jones · Answer

@Parag Doshi. I think the 1% rule was created somewhere after the 2008 crash when home values were way down.

I really don’t see a lot of 2% deals anymore and we are in a low cost market.

I have not really found any of the “rules” to apply all the time or really to be all that helpful.

Every deal is different.  I prefer to put every line item down with almost an exact cost so I can get hard numbers and have the % returns based off of those numbers, not the other way around.

If I walk into a place with brand new roof, furnace, windows, kitchens, bathrooms, with quality construction, plumbing, etc... I am willing to take less of a return because I know a higher cash on cash return with none of that stuff updated will have a cost to it, and bring my cash on cash over a 10 yr average way down.

Dennis M. · Answer

I would only invest in 3% or better properties but I’m in the Midwest . It is very common to buy a duplex for 30k and get 1200 in rent each month . That being said if you live in an area that’s hot you’d be lucky to hit 1% . I invest for cashflow and could care less about appreciation. If I get it , great .. if not then I’m okay too .

Aaron K. · Answer

@Parag Doshi the 2% rule doesn't work in most areas at this point in time, many investors have moved to the 1% rule, but the problem with both is that they are too broad and people try to apply them nationwide with no regard for the intricacies of a particular market.  For example you are looking at condos which could have several hundred dollars of HOA fees monthly, that throws a whole wrench into the 1% or 2% rule.  Invest in what will make sense from a total return and/ or cash flow perspective.

Greg Olkhovsky · Answer

@Dennis M.

You are a baller. I like your style. Good on you!

Does the 2% rule work most of the times?

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