How Accurate Is The 2% Rule?

[David Lowe]

I have been reading about the 2% rule but seriously questioning its accuracy. I got a great deal on a house in a desirable area of Austin for $297k. The rental we are getting is high ($2500) for the area. However, according to the 2% rule, the rent should be $5940. I don't know many places in New York where you would pay that for a comparable property. What % have you found when dealing with rentals? 

[Ned Carey]

@Brandon Turner tried to get people to call it the 2% test.  That is a  much better way to look at it.

The "2% test" is not even necessarily 2%. You have to figure the number that works for you with your goals and in your market. In some areas that may be 1% and others 3% may be realistic. 

The point is this is a quick screening tool to see if a deal is close to being a deal. I can use this test in my head in about 5 -10 seconds. That saves me a LOT of time ruling out deals that aren't worth more than 10 seconds to  look at.

Nobody says that a rental Has to be at least 2% or that a rental Should be 2%. It is a quick rule of thumb to let you know that if it is 2% you can pretty much count on that deal working from a cash flow perspective.