Where did the 2% rule originate?

[George Paiva]

Hi Folks, I thought there was a sticky somewhere spelling out the 2% rule and how it originated. Maybe getting confused with the 50% rule. But anyway want to find out how to back up the 2% price valuation.

[Jon Holdman]

This rule is a straightforward calculation. Unfortunately it contains a bunch of assumptions that are often unstated. If rents are about $500, you purchase with a 6%, 30 year loan, and are using a property manager (therefore putting your total capital, expense and vacancy in line with the more broadly applicable 50% rule), you will still make money if you pay about $25K. If rents are higher, interest rates are lower and you're self managing (and contributing your labor for free) that simple rule of thumb doesn't really work. The 50% rule (that is, 50% of gross rents will go to expenses, capital and vacancy), OTOH, seems to be much more broadly applicable. Many disbelieve it. But any time anyone's presented any significant amount of data (i.e., not just a rental or two for a few years) it seems to be borne out.