The 2% Rule is a Bad Rule: Discuss

[Andrew Syrios]

I am not a fan of the 2% rule, although I will say I think rent/cost is my favorite calculation. We usually determine what type of rent/cost we can accept in any given area and go from there. According to Gary Keller, the national average is 0.7%. Pushing for 2% at all times, I fear, will push investors to war zones with bad contractors doing subpar rehabs.

Cash flow is also variable, for example, a property you're all into for $20,000 that rents for $400 will not cash flow as well as a property you're all into for $40,000 that rents for $800 even though the ratio is the same. The fixed costs of maintenance, turnover and what not outweigh the more variable costs of taxes and debt service. Insurance can even have an inverse relation to price. 

We've gotten 2% before quite a few times, but in our lowest end areas. In the nicer areas, we get more like 1.5%, but do just fine. In our nicest, it's around 1.3%, which is tight, but the appreciation potential is better. So in other words, I don't think the 2% rule is very good, what are your thoughts?

[J Scott]

Before we start discussing whether a rule is good or not, I think we should all be on the same page as to the definition of that rule...

For me (and I think for many others here), the 2% Rule simply states that, "If your gross monthly rent is at least 2% of the purchase price of the property, the investment is likely a good one."

To say that the 2% Rule is a bad rule would be to say that you could be earning 2% of the purchase price in gross monthly rent and the deal is still likely not good.  And I'm pretty sure that's not what you're suggesting.

In my opinion, the 2% Rule doesn't say that an investment that doesn't meet this threshold is not a good investment; only that an investment that does meet the threshold *is* a good investment.