1% Rule vs 2% Rule - Whats the truth?

[Kory Denny]

Hey BP Community,

I have been talking to a few investors in my area and have read many posts regarding both the 1% rule and the 2% rule. Of course we all know that 2% usually comes at a cost. By cost I mean properties that don't appreciate relative to the overall national market, expensive marketing to produce such deals or even increased risk by investing out of state. I believe everything comes at some cost due to the ambiguous nature of opportunity. I also like to think that investors would compare local cash flowing properties to other properties across the United States at some point or another and weigh different strategies to diversify risk. There are also many investors who have out of state properties that cash flow great i'm sure. 

What I am interested in is the break down in your portfolios of 1% vs 2% properties. Im sure in some markets 2% is not achievable and others may surpass that. What percentage of your properties adhere to 1% and what percentage adhere to the 2%? Or what do you consider a a great ratio for those who don't own many properties yet?             80/20? 60/40?

Thanks for taking time to read and consider this post. 

[James McCormick]

I have been playing with the 2% rule in a spreadsheet. What I came up with is what I call the net income as a percentage of cost basis. First, I include renovation costs and purchase cost as the cost basis. Then I do a quick analysis of expenses, real estate taxes, insurance, management, vacancies, repairs, inspections. Then you simply divide the net income by the rent. This gives me the net income as percentage of cost basis.

My spreadsheet also shows me the projected rehab costs, the cost basis, (which is the purchase price plus the rehab), cost basis as a percentage of AVR (like for the 70% rule), equity, (which is simply the after repair value minus the cost basis), and net income per month. Now I have a sheet that I can use to evaluate a property. 

Then have a sheet called comparisons that I link the metrics of the property evaluation sheets of the individual properties that I am considering and I have a metric that I can compare one property to another and see which one would perform better per dollar invested.