Rental expenses

[Joseph Fellick]

I am a brand new investor trying to find the right SFH rental. I have heard of the 2% rule and the 50% rule I wanted to know what those two things mean and how they are used. also if anyone has any tips on how to evaluate a home. I am looking for some guide lines some people may fallow when looking for a house where the numbers will work

[Joshua D.]

best thing to do is search the forums for 2% rule and 50% rule and you will find long discussions on the topic.  But here is my short version

50% rule:  this rule of thumb says that all single family houses will average over long periods of time about 50% of the rent will go towards expenses. Whatever is left after that can go toward debt repayment including the cost to barrow (interest) 

This includes things like long term capital expenses, property managment, repairs, and vacancy

This helps people who say "well it rents for $1100 and my payment is only $900 so I make 200 dollars a month". That is why we have the 50% rule

The 2% rule: this rule of thumb says the if you are renting the house for 2% of the purchase price of the home per month than you will have good cashflow. 

For example: if I can rent a house for $1200 then I will pay $60,000 for it to meet the 2% rule of thumb. 

Hope this helps.