2% rule

[Scott W.]

I have been looking @ this formula w/ real case scenarios. The only way you can make this work is with very low price homes in suspect area. Now, if you do that, what's the quality of the tenants going to be &, even more important, how much appreciation will you get, if any? Your home value could even go down.

Let's say you buy a $100k home. $2000/month rent? Not gonna happen. $1500/month? Possibly.

Now the power of leverage kicks in. When values come back, you're going to see some years within the next decade in double digits (what comes up must come down, however, what comes down must also come up).

That $100k home hits 10% increase in value, that's $10k; the $50k will be $5k (I highly doubt you will get a 10% rise in value in the 'hood but I'll give you the benefit of the doubt). I'm $3800 ahead of your $50k home even with the "$100/door" profit.

I did find 1 property where I possibly could have hit 1.8% but you know what? I'd be risking my life...it's a block from 30 low rise housing projects. The agent didn't even want to take me there, proving my theory this property probably won't appreciate much in the future.

I'm sure, back in the glory days of double digit rise in values. many on here (not all) were ignoring the 2% rule & who could blame you? Ft Myers, FL had 32% increase in values one year.

[Jon Holdman]

Wrote this earlier today in another thread:

The 2% rule works OK for properties that rent for about $500 a month, that you manage with a property manager, finance with a 6% loan, and that you want immediate cash flow from. Any of those assumptions are false and you should ignore the 2% rule and actually do a detailed analysis.

The 2% rule is overly simplistic. I strongly advocate using the 50% rule to estimate expense (plus vacancy and capital), but not the 2% rule. Even the 50% rule can mislead you, but its a heck of a lot better than assuming taxes and insurance is all you'll have.