2% rule --- Not even close at the high end

[Darrin Carey]

Being BiggerPockets, we've all heard about the 2% rule. And we've seen several animated discussions about the rule driving people to lower income areas, and cheaper houses. Take a look at the other end of the spectrum.

In the Wall Street Journal (Apr 3, 2017) there's an interesting article. It's focused on politics, but the real estate pieces are interesting.

It's a $15,000 per month rental. The owner paid $5,500,000 for the property.

$15,000 / $5,500,000 = .27%

So, it's a 1/4 of 1% rental. At the very high end of the real estate spectrum.

Take a zero off the numbers. Would this be a good deal for you?

$1500 per month on $550,000 house.

Washington DC rental

Of course, the reporter quotes a local landlord who says it's a terrible deal.

There's no indication on whether there's a mortgage. Of course, the owner is a Billionaire, so this may very well be pocket change for him.

Will appreciation make up the difference?

Or is the goal different? Is this the equivalent of a CD for this investor, but with some upside?

What do you think about this deal?

[Gallagher Wilson]

I think there a lot of factors that weigh in conjunction with the 2% rule. In Seattle market, I don't think there is anyone buying a SFR getting close to 2% right now. My first buy, last year, was purchase price of $420,000, and it rents at $2400/mo. That's almost exactly .5%, which is far below the 2% rule. However, it cashflows at $400/mo, and is in a neighborhood currently benefiting from about 15% appreciation a year. The house was in perfect condition when we purchased it (owners had done all major rehab and repairs in the prior 3 years), so I anticipate being able to skate with minimal repairs and capex for the first 5 or so years. Most of the cashflow goes into a savings account, in 3-5 years will be north of $10k. Because its in the top 10% of homes in the neighborhood, so renting it at a high-market price is not a challenge at all. So yes, local market trends and cashflow are also very important. If I waited for a 2% deal in Seattle, I'd likely be buried having never bought anything.