Trying to understand 2%/50% rules

Starting Out
10yFollow

Trying to understand 2%/50% rules

Matthew Brand
Omaha, NE · Member since 2016 · 12 posts · 0 votes

I'm trying to learn more about REI and am having a little trouble with the 2% and 50% rules. I understand the concept, but I'm having a hard time believing that they're regularly feasible.

I currently own one rental property that I bought without doing any strong due-diligence. My positive experience with this property has me wanting to dive in more. When I learned about the 2/50% rules, I plugged in the values for my current rental to see how it shakes out. It comes in at about 1% for the 2% rule and just under $100/month for cash flow. So, that seems like it wasn't the greatest investment.

Where my issue comes in is that I can't imagine ever being able to get that sort of house for the rent required to hit 2%. Are there a bunch of deals that are close to those rules and I just don't know about them? Is it different per market? Something else I'm missing?

For reference, the rental property I have is in Omaha, NE and I get $1280/month in rent and I purchased the house for $123,000.

0Reply
31 views

Most Popular Reply

Matthew Swisshelm
Bellevue, NE · Member since 2015 · 134 posts · 28 votes
10y

The 2/50% rules are more like easy to remember guidelines that a lot of people like to use, they are NOT rules that are set in stone. Some markets they really can get these types of numbers. Real Estate being such a localized thing your area may not be able to support them. Like @Antonio Esquivel mentioned about the bad areas in Omaha. You could make them happen, but you would pay for it through other means I'm sure. It really comes down to knowing your market and creating your own set of guidelines. If you know that houses in the area you like will only rent for 1% of their purchase price, but it's in a great location that you really like, and it works for your business model then your rule would be 1% not 2%.

I hope this helps @Matthew Brand!

-Swiss

3Reply
See this reply in the discussion

11 Replies

Jump to latestLatest
  • Antonio Esquivel
    Realtor · Omaha, NE · Member since 2011 · 110 posts · 25 votes
    10y

    I don't even follow them, they are too vague in my opinion I think. In Omaha if you can find a house that cash flows 2% a month the area is not the best and wont attract quality tenants. I just calculate cash on cash return for the most part. I think setting a goal of getting 10%,15% or 20% return is better personally. 

    0Reply
  • Jason Kern
    Real Estate Broker · Portland, ME · Member since 2016 · 63 posts · 55 votes
    10y

    I've been using an app called "cap rate pro" to figure out if a property makes sense to me. I've got one property and looking at my second. My main focus is cash flow, then return. If I can get over 7.5 or 8% return while netting $200 per month I'll make a play for it. I haven't been paying much attention to the 1% or 50% rules. I've been more focused on what fits my specific profile. Also, I've been running the numbers on many properties to see what I WOULD pay given the opportunity for a specific property. 

    0Reply
  • Matthew Swisshelm
    Bellevue, NE · Member since 2015 · 134 posts · 28 votes
    10y

    The 2/50% rules are more like easy to remember guidelines that a lot of people like to use, they are NOT rules that are set in stone. Some markets they really can get these types of numbers. Real Estate being such a localized thing your area may not be able to support them. Like @Antonio Esquivel mentioned about the bad areas in Omaha. You could make them happen, but you would pay for it through other means I'm sure. It really comes down to knowing your market and creating your own set of guidelines. If you know that houses in the area you like will only rent for 1% of their purchase price, but it's in a great location that you really like, and it works for your business model then your rule would be 1% not 2%.

    I hope this helps @Matthew Brand!

    -Swiss

    3Reply
  • Matthew Brand
    OP
    Omaha, NE · Member since 2016 · 12 posts · 0 votes
    10y

    That helps, thanks guys. The cash on cash return for my rental is about 12%, nothing great, but I still think pretty solid. I think it makes sense to target that number instead of the other two. At the very least, 15% seems feasible if I'm more diligent about finding a property.

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    10y

    The 2% rule is fairly outdated just because of where we are in the general RE economy right now. I'd actually be hesitant about any property I find that hits the 2% rule.

    1Reply
  • Jason Yarusi
    Investor · Murfreesboro, TN · Member since 2013 · 430 posts · 178 votes
    10y

    General rules of thumb but not area specific and in NJ areas where you get the 2% rule generally come with a rough neighborhood so it depends your buying strategy.

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y

    A lot of these "rules" I never heard of before BP, so for all the good the site does, and I think it's a great site, it also has the unfortunate ability to replicate things I see as myths and have them become gospel. 

    The only "rule" I use is a general guideline when I am first screening a property, namely: after my all-in (rehab, purchase price, etc), I have to be able to rent the unit for at least 1% of my costs. If I can't make that number, I have no interest in the property. Most of my properties return 10-15% annually, after expenses, and I think that's an excellent return. 

    The only rule you should be living by is that you will evaluate each property on its own merits. Real estate is a local industry. Most "2%" places are going to be speculations in war zones, because the ratios are not maintained as prices increase - i.e., you might make 2% when you're buying a $20k dump ($400 is possible almost anywhere), but you're not likely to rent $150k houses for 3 grand pretty much anywhere. 

    Podcast Guest on Show #243
    Skyline Properties
    View Page
    0Reply
  • David Neese
    Developer · Bellevue, NE · Member since 2015 · 41 posts · 19 votes
    10y

    To hit the 2% rule you would have to find a good deal on a fixer in S. Omaha or in Bellevue east of 75 but it would be really hard to hit unless you found a crazy good deal.  It will most definitely only happen on homes at least 50 years old, most probably 100 years old.   In most of greater Omaha you are going to be looking at 1% being a good deal and you really have to look at it hard to make sure it can cash flow.  

    0Reply
  • Jim Adrian
    Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes
    10y

    Most places don't meet the 2%; 1% to 1.5% is more realistic.  Use that's as a back check.  The 50% rule is a lot better.  You might want to look at refinancing as this could create a better return for you.  The more money you put down on a rental the better you will be at hitting your numbers.  The other trick is to renovate the place and increase the house value and then perhaps refinance it.  My 2br rental in Papillion is pulling 1.5%.  The other thing to look at is when will major things need to be replaced like a roof.  Then ask yourself are you putting enough $$ away each month to cover the cost?  If not then it may be  a bad investment.

    1Reply
  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    10y

    None of my units meet either of these rules.

    That said, I run all my figures against these rules to see how close I am. I gauge market changes this way. CoC is a much better metric imo, ROI is good too.

    the 50/2% rules are just for quick and dirty math on the spot imo

    [email protected]Podcast Guest on Show #301
    0Reply
  • John McMenamin
    Investor · Bennington, NE · Member since 2014 · 13 posts · 3 votes
    10y

    Thanks for asking the question Matthew Brand!  I'm a new investor in the Omaha area as well and have been wondering the same thing.  

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free