2% rule but not? Explain?

[Tony Reale]

So I have read and understand the 2% rule but my question is for the non traditional home loan/mortgage. What percent do you want if it's just buy cash for a property? Seems to me 1% a month or 12% a year seems good to a non investor or am I not thinking of something the more experienced investors think of?

[Matt Devincenzo]

I personally think the 2% rule is junk. It really only works for properties that are about 25K and as you go up from there it stops being useful at all after about 50K.

The 50% rule says only that your expenses will be about 50% of your FM rent over the life of the asset. This has been verified for pretty much every asset class from SFR to commercial apt buildings.

But that still doesn't tell you about your investment return. I like cash on cash (COC) return. It tells me that for my say 15K investment I'm receiving 16% return. This can be done whether I'm leveraged or not, and shows what my cash is returning which would be what was interested in if I was to invest that money into stocks or some other investment. It is really not useful after the first year since it doesn't account for the time value of money(inflation), but your return during a specific year is what you would be concerned with in other investment vehicles so it is the best IMO way to compare what you are really getting for your investment.

I also look for a set return. I want at least $150/mo, that is because anything less even if it was 50% COC can be eaten up too fast on miniscule expenses. Certain costs whether it is a $400/mo or a $2500/mo rental will be the same, things like a CPA, eviction costs ect so just because you get a great % return you still have to remember that those costs could wipe out many many months of cash flow with just one specific event.