2% rule

[Charles Cline]

I was listening to the podcast where Josh and Brandon were talking about investing rules, the 2% rule seems rather unrealistic. Is anyone actually acheiving that?

[Matt Devincenzo]

The 2% rule is good if you understand the assumptions behind it. I don't remember what all of them are but here are the couple I do remember.

Purchase prices need to be in the 25-50K range generally.

The financing (if any) needs to be for about 6%.

As you start to move away from these assumptions it gets less and less accurate, especially the purchase price metric. It works best in blue collar midwest or more rural areas where prices have stayed historically pretty consistent. I personally don't use the 2% rule. Many rentals in the higher price points will not meet the 2% rule but will cash flow. The 50% rule is pretty widely verified across the entire country for all asset classes(commercial, residential, SFR, MFR). That is that your expenses will be about 50% of gross fair market rent for the area.

So using the 50% rule to estimate expenses along with Cash on cash return will IMO work better for the higher priced rentals. This is of course my personal view on the subject but has been what I have seen for myself.