The 2% Rule: Fact, Fiction, or Feasible?


It’s whatever you want it to be.

Have you ever heard the reasoning of why people buy something being that they “buy on emotion and justify with logic”? I think the 2% rule, as well as the 50% rule and any other related rule, falls into this realm of reasoning. I’m not sure how exactly, but I’m certain it does.

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The “2% rule” isn’t really a rule as much as it is a guideline that was created by real estate investors at some point in history that I’m really not sure of. The 2% rule says that for a rental property investment to be “good”, the monthly rent should be equal to or higher than 2% of the purchase price. For a $100,000 property, the monthly rent collected needs to be $2,000/month or higher to meet this guideline. There are various versions of this rule, the next most popular being the 1% rule, meaning you’d have to get $1,000 in monthly rent on the same $100,000 purchase.

The fact is, this guideline does exist and can be met with rental properties today.


Where this guideline gets sketchy is it doesn’t tell you two things: 1. the condition of the property or location and 2. Your net cash flow. Let’s say you find a $35k deal in Florida, with a monthly rent of $700. Meets the 2% rule, right? Right. Two problems. First of all, I can say with fairly high certainty say that any property you find in Florida for $35k is going to be a total junker. Secondly, insurance and property taxes are so high in Florida that joining those with the rest of your expenses, including repairs on your junker property, will most likely put you right at zero or less for cash flow. So much for that “good” investment.

Ok, yes, a bit of a stretch there on my hypothetical example, but it’s a good demonstration of why you need to realize there is a lot more to a property than “rules” and guidelines. I cringe when I hear people say they are looking for a property that meets those. Yes, I get that those are nice numbers to see, but they are far from what matters.

For example, the closest I ever got to meeting the 2% rule was a really nice property, newer and fully rehabbed, in Atlanta I bought for $55k and it rents for $975/month. However, this was back in the Atlanta hay day and can’t be found there now (if you do find it, be leery). As the Atlanta market progressed, investors were forced to forget about the 2% rule and start thinking about the 1% rule, otherwise they’d never buy anything in Atlanta. By the end of last year, you were lucky to hit the 1% rule! I say all this in reference to good quality nice properties, not cheaper low-income properties. Did barely meeting the 1% rule mean the properties were bad investments? No way! You have to consider quality, location, and tenants in any investment purchase, none of which have a thing to do with a 1 or 2% rule.


Are there properties out there now that meet the 2% rule? Absolutely. Are they getting harder to come by? Absolutely. While the Atlanta market has been skyrocketing quicker than a lot, the real estate market as a whole is on the upswing. In just a couple years, and more so in the last couple of months, I’ve seen cap rates really settle out below 10% for the first time. Investors are realizing they can’t get a property for as cheap and with as nice of returns as they could even just a year ago. It’s great news for the real estate market, all of our current investments, and the economy as a whole, but it is forcing investors to settle for lower returns.

Related: Battle of the Cap Rates

Back to this 2% thing. Yes, you can find properties that meet the 2% rule. However, it is almost a sure thing you will only see this on the lower side of purchase prices, likely the sub-$50k properties. At this point in the real estate market, sub-$50k is (in my humble opinion) sketch. I personally won’t buy anything in this price range. For one, the property is most likely going to need work to some unknown degree, and worse, you’re looking at the lower-class of tenants which most often cause a lot of expense in vacancy (evictions) and repairs. An eviction, followed by an empty house, followed by a nasty turnover repair cost really kind of blows your 2% delight out the window, does it not?

In terms of feasibility, here is my process with it when I’m analyzing a set of properties.

  • If it doesn’t meet the 1% rule, by how much does it not meet it and what market are you talking about? If you’re in Kansas City and it doesn’t meet it, bail. If you’re in Dallas and it doesn’t meet it, well, that should be assumed.
  • If it meets the 1% rule, it should be considered. Move on from there and run all the numbers on the property and check out what the cash flow will be.
  • If it meets the 2% rule, be leery, but check it out. Again market-dependent, if you’re in Kansas City, yay! 2% rule! Check it out seriously. If you’re in Dallas, someone has officially found you a junker in a questionable neighborhood that not only needs work but is going to attract a raunchy tenant who will never give you the full amount of rent anyway.

Again, my personal investing stance is centered on more expensive nicer properties. If your investing focus is higher cash flow, which means you are probably working with older cheaper properties, then the 2% rule is probably an okay guideline for you.

Point is, use the 2% rule or whichever one you want only as a guideline to get you looking at a property. Once you are into the numbers of a property and evaluating it for serious purchase, the 1 or 2% rule should never be brought up. In no way should it be a justification for buying a property. Simply use it to get your list started of properties worth considering.

That’s right. I said it. The 2% rule is stupid. Okay maybe I didn’t. What is stupid is if you buy a property because it meets the 2% rule.

Photo Credit: ralphunden

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.


  1. I believe the 2% rule is good only at market bottoms. What I am most concerned with is the 50% rule. Selling price in the low income rentals is whatever the market will give you. In Philly to make the 2% rule when selling, either the hot area needs to be moving your way or irrational exuberance must be in place.

    What is truly important is to have good cash flow, and pay off the property once you have massive cash flow each month who really cares if the property ever sells?

    One of my early mentors in low income, simply had an absolute auction of all his rentals when he had enough (he was 84). The properties in his words “owed him nothing”, had footed the bill for his 4 children to become professionals, and paid for his comfortable life style.
    He once told me that he never retired because he really never had a job.
    Let me add this about this investor he had no mechanical skills, because of this he never spent a second trying to personally add value to any property. Looking back I think he was smart for doing so. But then again I think the skill level of most handymen is very lacking today. I like to fix things once making them as bullet proof as possible.

  2. Great read Ali! I focus on cash on cash returns more than 1 or 2 % rule. I agree tenant quality, repairs needed and other individual factors are more important.

    I try to have at least a 24% cash on cash return in the 80k to120k price range.

    • I agree with your premise Mark. What are the numbers associated with the 24% cash-on-cash? Is that with a 20% down mortgage at 4-5% interest? What caps usually equate to that kind of cash-on-cash where you are looking?

      • I typically buy properties for about 100k and get 5 year arms with my portfolio lender. I use 5/30 arm at 3.62% right now. I can rent them for 1200 to 1300 with 10k to 20k of initial repairs. It’s all about buying them right. They are usually worth 150k or so whn I am done repairing them.

  3. Melodee Lucido on

    Great post Ali. From my senior status in life I have found that rules are made to be broken :O lol

    I have no desire to be a land lord but have been learning to wholesale small multis virtually. Your thoughts are helpful on my path.

    I do like the 50% rule due to murphy’s law and just-how-life-works—expect the unexpected and at the worst time . . . in addition to all the other vital pieces of the deal.

    Thanks for this!

  4. Daniel Fisher on

    So true Ali.
    Just this week a property came up in my area that at first glance looked enticing. 3/1 SFR listed at 23K with new roof, freshly painted and new garage door. It will rent for $1025 the ARV would be 95K.
    So I took a look. Turns out it needs another 50K. Hmmm right in the middle of the 1% and 2% rule. Using the 50% rule this is a solid investment! But!! Is the 50% rule feasible in this area??

    Not even close! This property’s taxes are $3700 a year which equates to 31% of the income! Add another 10-12% for a property manager and there is very little left over for maintance and tenant turnover costs.
    If I would have used rules to buy this property I’d have lost money!

    Great post

    • Thanks for the real-life example Daniel! That is perfect, and exactly the example I want people to realize in terms of these “rules”. ie they don’t always work. Glad you caught that one on that property before you went for it!

      Sneaky repair costs… 🙂

  5. Thanks for clarifying your expirience with that guideline. I was wondering what other peoples expirience with it was. In DC area it is virtually impossible to meet even the 1% rule right now (it was at the bottom though 4-5 years ago). So I am biding my time and building my cash pile for future investments either in the area or outside of it if we move.

    • Hi Lucas, you’re right, DC is one of the areas you’d be having a real good day to find a good deal that meets the 1% or whatever rule.

      My only thought is, why hold onto your cash and wait? Property prices are only going up from here, as well as interest rates (assumably). I live in LA so can’t invest where I live so I buy outside of where I live. It’s not for everyone, but I encourage you not to rule it out!

  6. I just heard the 2% rule get mentioned a few times lately here on BP. I had always heard 1% (located in SoCal) and it’s getting tricky to find that. But, I’m happy to say I have had success with it here and I always shoot for at least the 1% gross rents per month to purchase price. Also, I use the 50% rule because it factors in important things like management costs and PROFIT! If I manage myself, then I have more room but I’m not forced to manage if I factor 50% in. With condos I’ll sometimes use a 40% expense rule since I figure the HOA covers some of the pricier repair items.

  7. Ali,

    I also cringe when I hear the 50%, 2%, or even 1% rule from an investor. It actually makes me question their knowledge in the field if they use those numbers as their guide. I can understand running numbers in your head, but for more detailed analysis (even as much as back of the napkin) I think it is unwise to use someone else rule of thumb. I have my own historical data on cost on monthly costs. Its usually around 32% without PITI. and I throw an extra $100 per door into a reserve account for long term property improvements items as well. I look for a minimal ROI and monthly cashflow and work backwards.

    Good post highlighting the fact that even the most simple things in real estate are not so simple.


  8. Robert Steele on

    Well said. The 2% should be put out to pasture. It does more harm than good in stopping newbies jumping in and buying something because they cannot find anything that meets the 2% rule.

    Here in Dallas in 2011-2012 we could get 1% all day long after rents shot up. Now the house prices have played catch up and we’re back to how it’s always been < 1% 🙁

  9. Great article to read. Thanks for sharing. I think the 1/2% rule is just a quick analysis for a property. You have to go into more detail to really purchase an investment property.

    • Ali Boone

      Great question Taylor, sorry I didn’t expand on that one. Basically every market will have different ‘going rates’ (if you will) for what their returns are. So you want to look at whatever the current market rates are in order to accurately compare properties. For example, Dallas in general right now is seeing 5-7% cap rates as their standard. I don’t know what Kansas City is running right now, but Indianapolis for example is producing 7-8% returns on average. So if you were to go to Indy and look at a property and it only had a 5% cap rate, that would be low for that area. But a 5% cap rate in Dallas would be totally normal. See what I mean?

  10. In San Diego you are lucky to get a .5% ! That said, we have prop 13, so taxes start at 1% of property value & don’t go nuts if the property market does (good for the long-term crowd).

  11. Almost all our 11 properties meet the 2% rule. We bought them distressed but even after putting 100% (+) of the cash flow into capex over 5 years, we have a duplex that meets (just) the “4% rule” and an 11 unit at 2.9%. This is central Maine where it’s easy to get class B, fixed up units for $30k ARC.

    That being said, 2% rule is sort of like a “I left my calculator or spread sheet at home” back of the envelope quick test. I use the 2% rule more as a “final” test, after all my hard calculations. I actually know the gross rent, insurance, taxes, some utilities, and have a good educated estimate for all other expenses, so why do I really need any rules. If the cash flow shows I’ll earn 10% on my money, 12%, 15%, I’ll use that.

  12. Eric Martin

    Nice article appreciate the info. Let’s just say I’m a newbie well because I am and just starting the process of learning the REI world.

    So the rule of thumbs just from what little I have learned from 3 BP podcasts is a good quick analysis tool to weed out properties that don’t come close. For my own understanding of the process and numbers I ran some random MLS properties followed by a detail number crunch. For me if anything it taught me exactly what you all have said, do not decide buy using these numbers. Each one I ran that met at least met one of the 3 rules, 1%, 2%, 50%, but once you included other fairly fixed things like taxes it became negative cash flow not to mention once I added the others.

    Again thanks for the post.

  13. Senthil N.

    I am sorry but 2% is pure fiction. Not a question of if this is possible or not. How can anyone even suggest a formula on such a broad market as real estate. And then sure, call this a guideline as an escape route. Meaningless, if you are already acknowledging this is not to be taken too seriously. Guideline is just another word for fiction.

    It’s a disservice to mention fake rules like this, especially to a new investor – FYI, I am one of the new investors.

    • Ali Boone

      Sorry it sounds like you feel you’ve been misled by people, Senthil. All the more reason I try to write articles like this. It’s all about the education. There will always be people pitching who knows what and saying who knows what is required and is a necessity and all that jazz, and half of them won’t know what they are talking about. The best thing a new investor can do is just read everything and decipher for themselves what they feel good about and what they don’t.

      Where the “2% rule” went wrong is when it got called a “rule”. If it had always been specified purely as a guideline and people hadn’t been tempted to take it for the gospel of what should or shouldn’t be, it would have served a fine purpose. It did for a lot of people. Not so much in today’s market, but it was semi-helpful a few years ago when hitting 2% was attainable and it usually meant there was going to be some nice cash flow. But again, people took it too far and never should have allowed it to suggest they didn’t need to run actual numbers.

      Sorry again you feel like you’ve been done a disservice as a new investor! That’s never what should happen to anyone getting into this.

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