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?