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Updated about 11 years ago on . Most recent reply

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Rick Baggenstoss
  • Developer
  • Decatur, GA
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How would you improve upon the 2% "rule"?

Rick Baggenstoss
  • Developer
  • Decatur, GA
Posted

I've struggled, along with others, with the 2% rule. It has some drawbacks which I think can be improved upon with BP community help.

Simply stated, the income from a house should be greater than or equal to 2% of the mortgage.*

The * is that the rule doesn't apply to some markets like much of California or most major metropolitan areas. In other markets, you can get 3% where houses are cheap and repairs are about the same, turnover is high, or crime is higher ... for Josh, we'll say, Detroit.

In certain parts of Atlanta, you can sometimes only get 1% rule houses. However, they are less desirable areas, e.g. C or worse. In the A areas, you'd do well to get an 0.75% house.

House price also has a role, right? A 1985 construction, 2000 sf house that costs $400,000 in a more desirable part of town is going to have similar repairs to the same house in a less desirable part of town where the same house costs, $50,000.

To me, houses should be graded like bonds or stocks. Risk should play a much bigger role in the evaluation.

How do you deal with or adjust for these issues, if it all?

  • Rick Baggenstoss
  • Most Popular Reply

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    Chris Martin
    • Investor
    • Willow Spring, NC
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    Chris Martin
    • Investor
    • Willow Spring, NC
    Replied

    the 2% rule.... it is not 2% rule of law, it is 2% rule of thumb. The real estate 2% rule, 1% rule, etc., are used to simplify the equation and are not dissimilar to anyone analyzing stocks who uses a price to growth ratio rule of thumb (PEG ratio) or price to earnings ratio (P/E) rule of thumb. Different sectors have different PEG and P/E 'norms', kind of like different areas of the US have different 'norms' of 2% and 1% applicability.

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