Source: Yahoo! —
There are several metrics you can use to evaluate whether a rental property investment has potential, including the 2% rule. The 2% rule in real estate dictates that a property’s rental income should be at least 2% of the purchase price. Understanding this rule can make it easier to evaluate whether a particular rental property might be right for you. A financial advisor can help you create a financial plan for your real estate investment needs and goals.
What Is the 2% Rule in Real Estate?
The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.
For example, say you plan to purchase a property that costs $200,000. Using the 2% rule, that property should generate at least $4,000 per month in rental income. If you could only collect $2,000 in rental income then it wouldn’t pass the test.
The 2% rule is a variation of the 1% rule, which says that a property’s rental income should be at least 1% of its purchase price. If you were applying the 1% rule to the property in the previous example, then the property would pass with flying colors.
How to Calculate the 2% Rule
To calculate the 2% rule for a rental property you just need to know the property’s price. You could then take that number and multiply it by 0.02.
For example, say your budget for purchasing an investment property is $175,000. If you multiply $175,000 by 0.02, you’d get $3,500. That number represents the minimum or the base amount you’d need to rent the property for.
The 2% rule is by far one of the simplest calculations you can make to evaluate the projected return on investment for rental properties. You don’t necessarily need to know the property’s operating expenses or factor in any debt service if you’re planning to borrow in order to buy it.
What Does the 2% Rule Tell You?
I’ve been doing this a long time.
Finding 1% rule qualified property is tough. 2% seems unrealistic, especially in today’s market. Maybe if the bottom falls out… maybe. Am i alone here?
2% of the price?? As in “For example, say you plan to purchase a property that costs $200,000. Using the 2% rule, that property should generate at least $4,000 per month in rental income. If you could only collect $2,000 in rental income then it wouldn’t pass the test.” really? Do you live i the real world? Around here, houses sell for $375K and rent for $1,900 a month. And in a GOOD area for rentals, not here in the valley, they sell for $250K and rent for $1,350. Telling me that if I buy a house for $375K that I need to have rent of a minimum of $7,500 a month is ridiculous. (And I had 121 rentals as of 2019, with 119 of them showing positive cash flow. Sold off a LOT of them, at large profits, in the upturn, as I felt it would not sustain, but still have a few dozen left. So I’m not just some noob. No, your 2% rule does not work in real life)
I could not agree more. This 2% article is hogwash!! “Click bait”.
2% rule in rental is unrealistic. Which shows the author of this article is hanging on cloud, totally stupid. I’m in a rental business for 35 years and the rule of 1% is reasonable to apply.
John F, absolutely right. I’m in Northern Virginia and I’ve been an investor and Realtor since the 70’s. Best I ever saw was 1% in ’73, before the sales price jump in 74-75 when rents dropped to .05% and never caught up again. Typical $700K house rents for $3500 at best.
That’s the dumbest article ever. So if I could find a really nice 80,000 property I should get 1600 a month. Are you kidding. If that were the case I’ll take 5 of those. If I could find 200k properties bringing in 4k a month, I’ll take 5 of those too.