2% of purchase price or ARV

[Jinyu D.]

I always hear the 2% rule as a guide line for rental properties. But I'm not sure whether it's 2% of your purchase price or 2% of the ARV. If the property needs rehab and the repair cost will make a big difference on evaluation.

[Nick Baldo]

Jinyu, 

You should calculate the 2% rule based on your total initial investment. In the scenario you describe above, take your purchase price + your expected improvements to get to your total initial investment. You can also potentially increase your expected monthly rent based on the improvements you have planned. However, be careful! An improvement such as a new roof may be necessary...but it will have little to no impact on rents.

As you probably know, the 2% is just one quick metric to use when analyzing a property. For our company, the 2% rule is a quick guideline to determine whether or not we should continue analyzing the property in detail. If we get somewhere between 1%-2%, we'll continue with a thorough analysis that considers NOI, Cap Rate, Debt Service, Cashflow, Cashflow/ unit, etc.

Hope that helps.