2% Rule/Test

[Account Closed]

Hello fellow Real Estate Investors!

I was trying to wrap my head around the 2 % and how I can figure out which percentage applies to my market but now that I was testing the BRRRR Calculator I've gotten more confused, because it explains the rule as being "Income-Expense Ratio" opposed to "Monthly Rental Income-Purchase Price", as I've seen in many places. Does anyone why is this?

I've read this article on the rule, (https://www.biggerpockets.com/renewsblog/2013/04/1...) which explains it pretty well but I still I don't know what number applies as a screening tool for my market. I'm pretty sure 2% is impossible to hit in my location, which is highly overpriced right now, but how can I know if I should hit 1% to even consider buying it? I don't have enough experience to know the difference between a good and a great deal.

For example, my first and only deal was all cash (which now I'm looking to refinance), and the total invested capital was 91,171.00€ with a gross annual cash-flow of 5520 €, so that gives me a COC return of 6.05%.

Is this bad? 

Of course, when I refinance this property and only have about 20% of invested capital in it this number will be much higher but that doesn't affect the 2% rule/test at all.

Cheers! = )

[Brent Coombs]

@Account Closed, most BP members would suggest you should be investing for more than just 6.05% annual return on a $91,000 outlay. It seems to only make sense if you're ALSO expecting a significant appreciation in its value. Has that happened?

Next, what will happen to its cash flow when you pull out 80% of its value? Still positive?

Nope. Why? Because its 80% mortgage will cost over $6,000 per year = more than its cash flow!

That's why any investment that gets less than 1%/m gross return is VERY hard to cash flow positively while you're trying to leverage it highly as well!

But the answer is NOT: borrow less. The answer is: find BETTER deals! Cheers...