Denominator Used for 2% Rule

[Cole Swartz]

I understand the effectiveness and validity of the 2% Rule varies from market to market and that there have been an abundance of discussions regarding the topic, but I am curious as to the different variables people use in the equation itself. Obviously, the numerator is the Gross Scheduled Income, but what do you folks use in the denominator (purchase price, purchase price + rehab costs, ARV, etc)?

As I've browsed the forums it seems different people have slightly different interpretations of the equation in this matter.

[Chad McClain]

Denominator should be the purchase price of a rent ready property. Turn Key is just purchase price, rehab is purchase price + cost of rehab

Examples from my portfolio:

Rehabbed property: purchase $54k +15k in rehab costs rented at $1,400/mth = 2.02%

Ready to rent property (minimal work to make ready): purchase $80k + 1k rented at $1,400/mth = $1.73%

Conveniently, the latter property cash flows better, but that is why it is just a way to figure out if a deal is worth pursuing further.