2% Rule

[Derek Grijns]

I am fairly new to Biggerpockets but I have been reading books, listening to webinars, podcasts, and following the forums. I just cant really grasp the idea of the 2% rule and why its even called a rule. I understand that it can be used as a guideline and not a set in stone rule. 

I am a commodity broker so I am used to looking at and breaking down numbers. everyday.

I also live in fairfield county where the avg. home price is $1 million. 

That being said here is an example from a BP book below.

The 2% rule states that your monthly rent should be approximately 2% of the purchase price. In other words, a $100,000 home should rent for $2,000 per month; a $50,000 home should rent for $1,000 per month. This is a very conservative estimate that is very simplistic, but can help in deciding if a property warrants a deeper look. In most parts of the country, the 2% is very difficult to achieve, but the closer you can get to that, the better cash flow you'll receive.

okay. it claims that the 2% rule in most parts of the country is difficult to achieve. If that's the case then why is it even called a rule?

heres my example:

$100,000 home = $2,000/month, this you can profit from

$1,000,000 home = $20,000/month, these numbers make no sense

the math just doesnt make sense. there has to be another part of the rule. different parameters and tolerance levels based on region. 

In what areas does this rule hold true? If it doesnt work country wide then why is it called a rule. You simply cant follow this rule in and around major cities. Once you start getting above a home purchase price of 150k-200k the rule starts to lose any value and guideline.

There has to be something else. 

Thanks

Derek

[Dawn Anastasi]

I think the consensus on the forums that the "2% rule" should be renamed the "2% test".