Does the 2% rule apply to ALL CASH DEALS??

[Ray Dixon]

Should the 2% rule be applied when your purchasing a property with ALL Cash????

[Jon Holdman]

The 2% rule works best for $500 monthly rents. Its does assume financing, and gets you about $100 a month, assuming 100% financing.

The 50% rule, OTOH, always works, seemingly regardless of price. It doesn't consider financing.

Commercial deals often use "cap rate", which is NOI / purchase price. If you're paying all cash, this metric applies. Combining the 50% rule for all expenses and the "2% rule", you get a 12% cap rate. The "1% rule" gives you a 6% cap rate.

Rent: $500
Expenses: $250 (50% rule)
NOI: $250
Desired cash flow: $100
Max payment: $150
Max loan: $25,018.74
Ratio: 2.0%

Now, consider a realistic financing scenario
Price: $25,018.75
Down: $6,254.69 (25%)
Payment: $112.50
Actual cash flow: $137.50/month
Actual cash flow: $1650/year
Cash on cash return: 26.4%

Pay all cash:
Actual cash flow: $250/month
Actual cash flow: $3000/year
Cash on cash return: 12%

Now, with $1000 for rent, some steps omitted:
Rent: $1000
NOI: $500
Max Payment: $400
Max loan: $66716.65
Ratio: 1.5%

Loan:
Down: $16,679.16
Cash flow: $200/month
Cash flow: $2,400/year
Cash on cash return: 14.4%

All ash
Cash flow: $6,000/year
Cash on cash return: 9%

If you are buying all cash, and do apply the 2% rule, you keep you cash on cash return up at 12%, as for the other example.