Question about the 2% Rule...

[Alexander Gruber]

Hi! I'm completely new here, so apologies for any incorrect formatting. I've recently become interested in multi unit rental properties, and have read/heard in numerous places about the 2% rule. The rule basically states that monthly rent should be approximately 2 % of the purchasing price. 

I live in Denver and ran quick numbers on a few of the properties that I have been researching here, and can't imagine that I would be able to get anything  close to 2% of the purchasing price, as most duplex and triplex properties seem to be in the $550,000 and up range. This would mean needing to collect $11,000 in rent or $5,500/duplex and roughly $3500/triplex per month. 

Therefore I've got a few questions...

-Am I simply misunderstanding this rule in general and applying it incorrectly when crunching these numbers?

-Alternatively, I realize that the Denver market has been extremely hot, and am wondering if the prices have been driven so high that common real estate knowledge (such as the 2% rule) would indicate a poor buying opportunity?

Thanks so much for any assistance and info! I hope that I can provide the same in the future!

[Joe Hines]

Hi @Alexander Gruber!

Generally speaking, you have it right.  The 2% rule should be viewed as a rule of thumb that lets you quickly evaluate a potential investment property.  To do a deeper analysis, I'd recommend using the Rental Property calculator under tools on the BP site.  There are some things about it that are a bit cumbersome, but it's pretty thorough.  It will guide you through capturing key cost drivers and assumptions and then provide you with several key property investment performance indicators.  I used to use my own spreadsheet and my build some of those functions into that, but it's pretty good.  

You will find that you can find good cash flowing properties that might be under 2%.  I'd also add that most of the time its more like the 1% rule.  I've found that 2% is pretty rare.  I think I have 2 that perform that well and over time I've been able to raise rents to get them closer to 2%.  

Good luck!