Estimating rents by mortgage/LTV

[Robert Scaife]

This may be a strange question, but what's an easy way to estimate a good rent based on a simple mortgage amount? Is there an easy, "do in your head" way to estimate w/o pulling out a calculator?   I found a property I liked in my hometown and it is in a great location, close to the school and the park (within 250m either was), but when I plugged it into the rental calc I was getting strange numbers like a 1.15 on the 2% rule... etc. I was estimating rent on the market, so perhaps the property is over-valued for a rental?

Anyway, I hope my question makes sense.

[Nick G.]

Hey @Robert Scaife. Yes, it is possible that the property you evaluated was overpriced. It is also perfectly possible that it was underpriced, or that your rent estimate was off. In other words, it sounds like you may be using the 2% rule of thumb a little incorrectly (and I used to do the same,) because the 2% rule should never be used to form hard and fast opinions on property performance.

To answer your first question, you don't ever ever want to try to calculate a "good" rent based on a mortgage amount, simply because there is absolutely no connection between the two numbers at all for that purpose. So don't do that. You might personally like to see $1,000 in rent for every $100,000 of mortgage you carry, but that's up to you, there is no connection between the two otherwise - what if one mortgage is at 4%, and another is interest-only at 8%? What if one mortgage is on an 8-unit and the other is on a condo? Way too much disconnect for any reliable or accurate figures.

The 2% rule is not used to determine how well a property is priced, nor is it to be used to determine whether a property's rents are "good" or not. 1.15% is not a strange number at all, properties in my area are lucky to hit 0.6% - all it is, is a super-basic and quick calculation that can help give you an idea of if the property may be able to cashflow or not. That is all, nothing more, and it hardly has any serious value to begin compared to a proper analysis since it is just a rule of thumb.

The 2% rule, at its finest, goes like this - you have three homes in the same city/area.

House A - $100,000 - rents for $2,000/mo. Rent:Price ratio% is 2%.

House B - $280,000 - rents for $3,000/mo. Rent:Price ratio% is 1.07%.

House C - $190,000 - rents for $1,500/mo. Rent:Price ratio% is 0.78%.

House A, according to the 2% rule of thumb, has the greatest chance of cashflowing compared to the others. It doesn't mean it's a good property, it doesn't mean it's priced well, and it doesn't mean the rent is accurate. All it means is that at those pro-forma numbers, that house *seems* to have a higher likelihood of cashflowing than the other houses since the rent numbers are relatively higher than the expense numbers comapred to the other properties, which can be useful for determining what properties are worth your time to put in a full analysis on, or running super-basic numbers in your head while driving around to get a vague idea of a property's potential.

The 2% rule of thumb is often believed to really start losing effectiveness/accuracy after roughly $150,000-$200,000 price points. Bottom line is, it's a very rough