50% vs 2% Rule

[James Syed]

Hi BP,

For a single family house that rents for $600 (all utilities paid by tenant), which rule is better 50% or 2%?

I just want to compare these two rules. I understand purchase price is determined after detailed analysis.

[Dave Savage]

@James Syed you are comparing two different metrics. The 2% rule is generally for determining what the purchase price of a property should be (and can vary widely in different markets, many markets won't get above 1-1.5% but may have appreciation which might make it attractive to you). For your property at $600/mo if you wanted to purchase the property and follow the 2% rule you shouldn't pay any more than $30,000 including any repairs you might want to make to your property.

The 50% rule is generally stating what % of rent will be taken by taxes, property management, vacancy, maintenance, etc to allow you to have a rough idea of monthly cash flow before Principal and Interest. In this case you could roughly assume $300 cash flow and then subtract any holding costs. This could vary as well with your tax rate, etc. Generally include PM costs even if you will self manage so you could change it over in the future and still have positive cash flow.