Why is there a 2% rule ? Why isn't rental investment the easiest?

[Conor Goddard]

Hi All!

I probably have the most newbie question ever, but can anyone explain to me why there's a "2% rule" and why getting a loan and then having a tenant pay it off isn't the easiest way to gain an asset?  What am I missing? Is it that the expenses add up (property tax, mortgage insurance, repairs, etc) and you end up losing too much money? 

It just seems too easy to put $30k down, get a loan for another $150k, buy a house, rent it out for whatever the mortgage is...Even if you end up losing $200 a month, you end up with full ownership of a house in 15 years. Is it too hard to get a loan for that? Please help because I'm obviously not seeing it all. Thanks!

[Joseph Walsh]

Welcome, 

I happen to of asked these same questions over the past few years....

Yes, you would be better off putting it in the stock market.  30k down, plus $200 a month over 15  years at 10% is a little over 200k, so it's  a wash.  However, for 15 years, you haven't had to deal with a tenant, the risks associated with having a tenant/house you don' t live in, etc.  Plus the investment is liquid, and you can even forego the $200 monthly contribution if you must, with the house, you're on the hook for 15 years.  And if you need to liquidate it, you're AT LEAST 30 days out if you are able to sell it on day one.

However, you do lose out on potential appreciation on a $150k asset, so there is that.  All things considered, your basic analysis isn't flawed, however you can do much better than "break even" in most cases.  Break even is about the same as S&P500 and a lot more work/risk.

The 2% "rule" is a general guideline that, in most cases, if a property meets that, you most likely will turn a monthly profit that makes the property worth a closer look.  Again, it's really just a guideline.  Look at the numbers, it's just a guideline, and your criteria come into play.

Good luck.