2% Rule

[Matthew Gainey]

I was explained how the 2% rule works but I have confused myself as I'm sitting here thinking about how to use it and what it is exactly for. Please help!

[Corby Goade]

@Bill B. This might be the best post I've seen on BP- I'm usually the one fighting this fight. 

To piggyback on this- in general terms, the higher the ratio of rent to purchase price, the less passive your investment will be. Higher vacancy, high maintenance tenants, high maintenance properties, little to no appreciation, etc. 

I work with clients who are buying properties that rent in the range of .5% of the purchase price. They never have vacancies or late rent, maybe a maintenance call or two per year and build well over $50k per year in equity- many of them over $100k per year in equity. 

Funny thing is- almost all of the talk on BP is about cash flow- don't get me wrong, cash flow is great, but equity is what allows the "average" person to leverage and grow and truly become wealthy. If you buy in desirable, growing areas, you will build up cash flow over time AND have equity growth. In areas where you find these 2% deals, you won't have such luck. 

There is always a trade off- you trade cash flow for passivity and equity and vice versa.