2%-1% rule/ $100K-$800K Scale

[Boaz Golani]

Hi all. I live in a very expensive area where I look to invest in a multifamily. I have been crunching numbers now for several days on hypothetical properties based on prices in my neighborhood and came to interesting conclusions regarding the 2% rule which I would love to share and see what BP pros think. As I see it the 2% rule is a necessity for low-priced properties, and very unlikely to be found for high-priced properties. When BP pros discuss the 2% rule, really they discuss the 1%-2% rule. If you can only get 1% of the property price in rent per month on a low-priced type of property you are probably running into trouble. But when you look for a high-priced property of a similar type where getting 2% of the purchase price in rent per month is very unlikely the 1% may still look quite good. The reason for it is that expenses don't grow is a linear ratio to the cost of the property. Rather they grow significantly more slowly. For that reason the more expensive the property is the higher the NOI is where the 1% is a constant, meaning that the rent is always 1% of the purchase price per month. So if the monthly rent is always 1% of the property price then the relationship between the property cost to the monthly rent is linear. But if the property expenses grow at a much slower rate relative to the increase of the property price then the relationship between the two is a declining curve. That means that the more expensive the property is the higher the NOI is.