50% rule or 2% rule?

[Darren Campbell]

I recently read Brandon Turners book on Rental Property Investing. I talked about the 2% (rents should be 2% of sale price) rule and 50% (rents should be multiplied by 0.5 - principal and interest if mortgage) rule. Which of these do you typically use first to analyze deals quickly?

[Joe Splitrock]

Originally posted by @Darren Campbell:

@Joe Splitrock

Thank you very much for the clarification. So to be clear I will need to multiply 50% by the amount I would be financing correct? Not the sale price.

Also how would you recommend learning what multiplier to use whether it be 1.5% or less?

 The 50% rule is to determine expenses. I will use an example. Property for sale for $100,000 and monthly rents are $2000. Multiply the $2000 by 50% and that gives you $1000 which is the expected expenses for the property (insurance, management, taxes, utilities, vacancy, etc). So if you paid cash for the property, you would net $1000 each month. Next step, calculate principal and interest for financing. Take $100,000 and subtract down payment. Let's say you are financing $80,000 after 20% down. Now plug the $80,000 into a mortgage calculator at expected interest rate and term. That will give you monthly payment. Subtract monthly payment from $1000 and that will give you monthly net cash flow.

As far as your multiplier, I would just start analyzing properties to get a feel for the average in your area. It is very easy to do. Just take gross monthly rents divided by sales price. Get a feel for the market.