2% Rule is the Stupidest Thing EVER!

[Ben Leybovich]

It's misleading as all hell.  It doesn't focus on the truly important elements of the underwriting.  And @Brandon Turner is not helping anything by continuing to talk about it on his webinars.

[Note from Brandon: see my response at the bottom of page 2 of this thread... ;) ]

Who cares what the income is? The NOI is what's important. 2% Rule is garbage and cannot even be used as a rule of thumb, y'all!

Learn how to analyze property, and run far and fast whenever you hear anything about any rule of thumb.  There are no rules of thumb in this business.  Be professional about this...

[Brandon Turner]

Ok, since I was called out, I'll have to enter the discussion. 

So, I've never once, ever, told someone to buy a property based on the 2% rule. I explain what it is, and then why it falls 90% short. So just to be clear, Ben is the master of "politician debate" in which he states a premise that is made up, and then will argue that premise till the day he dies. :) 

That said, the "2% rule" is just a fancy way of quickly screening properties. We all do it every single day if we are analyzing properties. I've talked to @Ben Leybovich numerous times and he's told me how he spent "8 hours analyzing a deal."  If ben "properly" analyzed every single deal that came across his computer screen, somehow I doubt he's have time to come onto BiggerPockets for Politician Debates.  Instead, Ben probably sees 200 properties in an hour, and his brilliant deranged experienced real estate mind can quickly filter the properties out and he can say "Nope, nope, nope, maybe, nope, nope, nope" very quickly. Every experienced real estate investor can do this.  

How? 

Because we are super gifted, smart, and good looking..

Because we use internal rules of thumb, whether or not we want to admit it. Let me explain. 

They may not have a name, but if someone tells me "Hey Brandon, I've got a single family house for sale. It will rent for $1,000 a month and I'm selling it for $3,000,000. "  According to what Ben is saying, he would sit down with his spreadsheet and plug in every single number for this deal to determine if it was a good deal. But we all know this is just not the case. There is no possible way he does this. Instead, he just KNOWS that a ratio of $1,000 a month in rent would NEVER cash flow for a $3,000,000 property. And THAT, my friends, is Ben Leybovich doing the 2% rule.  The 2% rule is just another word for "Income vs Purchase Price" and we do it all day long. Of course, if someone is dumb inexperienced enough to believe that by simply running a property through the 2% rule they can make a confident decision, well they have a lot of reading to do here on BiggerPockets and I'd like someone to show me where any experienced investor on BP has made such a claim. You won't find it, just people like Ben being confused by what the 2% rule actually is. 

The point of the 2% rule is to help people build a baseline for which to analyze properties quickly. You find out what % might work in your area and what won't -  then have an easier time quickly scanning through properties.  In my area, I know that ANYTHING below 1% is not going to work, so I don't look at them! Call it the 2% rule, the 1% rule, or whatever. It doesn't matter. It's about learning how to do quick rules of thumb, in your head, to not spend 25 hours a day analyzing deals like Ben Leybovich claims to! 

Bring it on, Ben! :)