Is 2% rule still applicable?

Question

Hello, I am new to real estate investing and this is my first post, so I apologize if I’m posting in the wrong location!

I have read a few books and done quite a bit of research, but still have a ton to learn! My plan is to purchase multi family units (smaller apartment or a couple townhomes). I have analyzed over 70 apartments and townhomes and have not found any that meet the 2% rule, in fact, most are not even close. Is anyone out there finding newer (20 years old or less) multi family units that meet this rule? I’ve done a lot of searching on Loopnet, google, Craigslist, local papers, etc. Any advice or direction would be appreciated!

Ben Zimmerman · Answer

The 2% rule should have never been a 'rule' and I wish it would die off, just like the 1% rule, and every other rule that gets thrown around these forums.  BP has readers from all over the nation, in many different types of markets.  Readers who are trying to learn and educate themselves hear about these 'rules' and think that they are true, when in reality that number may have never been appropriate for their geographic location (either too high or too low), let alone be accurate a decade after the podcast was made during the greatest real estate crash in the history of mankind.  Instead of teaching people accurate ways to calculate their expenses, we advocate for people to use these shortcut rules that could be wildly inappropriate in our market.

Also I think that anyone who claims they won't get out of bed for less than 3-5% is being very disingenuous to the overall question at hand.  While you may be able to get 5% returns by buying 100 year old homes for 10-15k each and then renting them for 500-750, that is nowhere close to the norm in the US, and does not accurately portray the financial prospects of owning homes as old as these.  Unless you are buying super cheap homes for under 100k each, or are purchasing homes in areas with consistently declining population, you will likely not hit these 'rules'.

The median home in the US is valued at 231k according to zillow.  If you are buying anything even remotely close to that you will not reach this mythical 2% target that should have never existed to begin with.

Seth Borman · Answer

The 2% rule was always for people that are buying in rough areas with little hope for appreciation.The 3-5% rule is new to me but based on other posts I would say that this is slumlord territory. Having worked in a somewhat high crime, low income area I'm glad I'm not trying to play that game. Just keep in mind that people that expect those returns aren't necessarily in the same business that you want to be in.

Greg Dickerson · Answer

Using any rules of thumb is never a good idea. Take gross rent ratios which you are discussing, this is all dependent on interest rate, down payment, loan type and term to generate break even and cashflow.

Best thing to do is run the numbers to determine if the deals works for you. You can do this in a matter of a few minutes just take the NOI and subtract debt service and equity returns if any and it either works or it doesn’t.

Taylor L. · Answer

It's not really viable at this point in the market cycle. The 2% rule was never really meant to apply to apartment complexes, and it was only intended to be a very rough indicator anyway. You're definitely not likely to find a <20 year old property on the MLS that meets the 2% rule. If you do, look for potential landmines.

Best advice is to get more detailed in your underwriting. You'll still need to look at a lot of deals, but also dig deeper on them to figure out whether they work or not.

Shawn Coverdell · Answer

I never really value properties this way. Learn to BRRRR with cash purchases. Not borrowed cash like some are trying to do which is ok but not the real deal.  Real Cash, your cash.

If done correctly which is not hard to do, Your returns will be oddly infinite. Or difficult to calculate because $$$/monthly from zero into the property (after refinance) = ????  much debate.

but I tell you what. My calculator will not give me the answer. Especially when you consider that each house equity becomes another and another etc.

Shawn Coverdell

Homes in the Hood

David Smith · Answer

When you check deals from ny to nj to pa , you WILL see all lots of % !!!

like a domino.   You pick what you want.  But, I will diversify with different areas to be safe.

Nathan Williams · Answer

I assume you deal with large unit investments or off market discount deals?  Because I havent seen any 1-4 units touch a 3% rate in some time

Dennis M. · Answer

I would not do a 2% deal unless the place was immaculate with a lot  of upside . That’s too marginal with not enough cash flow !I want 3-5% deals . 1% -I would not even get out of bed to go look at the property . Pointless !

David Miller · Answer

@David Smith thanks for the response. I realize I’m going out on a limb here by asking this, but do you know of any multi family dwellings currently for sale that I could look at as an example?

Is 2% rule still applicable?

Most Popular Reply