The 2% rule kills values

[Jay Hinrichs]

As one who had never heard of the 2% rule or 1% or any of the other terminology that floats around BP,, I just became aware of the 2% rule. I was talking with a fellow from Oregon who was lamenting that there are no 2% rule properties to be had in Oregon when I asked what is this 2% rule he said if a property cost 100k it needs 2k in rent.. Well that's not going to happen anytime soon around here. But I told him it happens in the Hood's of America fairly regularly. Mainly because you need those kinds of margins to make 1% or less when the missed rent increased maintenance etc etc of owning them comes into play.

So then I got to thinking well heck if everyone is running around wanting the 2% rule and if that is the only way folks will buy the lower end rentals then the values will never go up. As values could only rise if rents rose.. And we know rents may rise a little bit and HUD stays fairly stable year in year out.. And so many of these properties rely on hud to get some kind of consistent cash flow. So if one is buying in these areas and uses the 2% rule then justifies their investment because historically real estate rises this just won't happen if all your buyers use this rule... The values will just remain the same the neighborhoods do not turn around for the better they get worse as more renters move in etc etc. Your forever stuck with a value that is 2% no matter the condition of the house history or lack thereof of rental rolls.

[Dean Letfus]

This is a classic example of mass stupidity IMHO.  Someone invented the 2% rule because that was the sweet spot AT THE TIME.  It was never a "rule" it was simply a calculation that fitted good deals at that moment.

It is no more valid than saying you should never pay more than 2 grand for a brand new car. That was a sound rule in 1970 but it is laughable now.

Unless value to rent ratios remain static there is no such rule.

Just like the 2% rule.........