Can SFRs really meet the 2% Rule?

[Ben Kiekel]

Hi everyone,

After doing lots of looking around in and around my area, it seems like getting 2%/month for rent is quite ambitious.

As I understand it, the rule/guideline basically suggests that if you spend $100k on a property, you should be getting $2k/month. I'm also assuming that any rehabs are included in the $100k for this valuation.

Are you guys really finding these deals? The problem I'm running into is that the cheaper properties that might get better percentages will require more upkeep (they're a reason they're selling cheap!) So I'm having some trouble believing that 2% is realistic; I'd love to hear what you all think about this.

Also, I'm new to the forum, so if this has been discussed somewhere else feel free to point me in that direction.

Ben

[Jon Holdman]

You're applying this (stupid) rule backwards. You start from the rent, which is the thing you have the least control over. So, if rent is $1000, then the most you can pay, according to this rule, is $50,000. If you can't buy the property for $50,000, don't buy it.

There are a bunch of assumptions in the rule. In particular, that the rent is about $500, that you're getting financing for around 6% and that you would like to have $100 in real cash flow if you financed it 100%. If any of those assumptions don't apply, the rule doesn't work. So, with today's lower rates, you can afford to pay more. If the rent is higher, you can afford to pay more.

Now, underlying this rule of thumb is the 50% rule. That says expenses, capital and vacancy will average out to about 50% of the gross scheduled market rent. That's been shown to be correct by a couple of very large datasets for 100,000's of apartments. For any particular property in any particular year, you may do somewhat better or quite a bit worse.

You can also earn a slice of that 50% if you do the management and minor maintenance yourself. New investors often say "boloney", it can't be that high. But it does appear this is a pretty solid rule, whenever anyone has offered up any significant amount of data.

Not the debt service, the P&I part of your payment, is NOT included in the 50%.