2% Rule

[Terry Madden]

Hi All, I'm new to real estate investing and am eager to obtain as much knowledge as possible. Currently, I own one property that I live in and one rental property. One of the general rules I am familiar with is the 2% rule when renting out your property. My rental property was purchased for $330K. I am currently renting it for $2500 per month which just covers the Mortgage. None of the rent in the area exceeds this price. Using the 2% rule, I am way under the monthly price of where it should be. My question is: should I try and sell this property and move to the next? Or, is holding it right now at the current rental price a wise decision? It's a brand new unit with an 11 year warranty on everything, so I have limited worries with anything going wrong. Any advice is greatly appreciated. Thanks!!! Terry

[JD Martin]

I'll be the blasphemer, but the "2%" rule doesn't make any sense whatsoever in many parts of the country, and yours is one of them (I grew up in Orange). The only places you are going to find 2% as a new entrant into the market is in the war zones like Camden, and that brings a whole bunch of problems with it. Some markets are just not feasible for rental property as a short term cash generator, but long term you probably see good appreciation versus other places that can produce cash now. 

Don't go by any "rule" that anyone told you. Evaluate each property on its own merits. In the case of this property, you are probably on the edge of serious financial peril unless the area is rapidly appreciating and you can swap some short term high-level risk for longer term capital gains. If you bought the property as a rental and the market is maxed out, you should probably think about selling.