The 2% and 50% Rules

[Philippe S.]

It seems impossible to me to find deals that will follow the 2% or 50% rules in the Montreal region.  Is it just me or the numbers should be different in our market ?  What are the rules that work for you?

[Jonathan Makovsky]

@Philippe S. I do not know the Montreal market, but will chime in from my area.

The 2% and 50% "rule" are NOT rules. They are general guidelines that may or may not be good indicators of properties to buy.

The 2% rule is just saying that the monthly rent is 2% of the purchase price (or if you annualize that 2% x 12 months then your annual rent is 24% of the purchase price). However, sometimes the topline figure is only part of the equation. Think about Amazon - who is crushing it in revenue - but for so long was losing money on their bottom line, and the reason is because their expenses were higher than their revenue. 

Now, I will apply it to some of the markets I am in where you can easily find 2% all day. However - in my opinion - many of them are junk and will not cashflow because the expenses can be so high, particularly the real estate taxes. Yet in other parts of the country the taxes are 1/3 of my market AND other costs here are higher too. So don't just look at the topline (i.e. 2% rule) to see if there are deals.

The 50% "guideline" is also a guideline, however, I would strongly recommend using the BP Calculator for a better idea of your returns. There are still assumptions that will be hard for a newbie investor to calculate (e.g. Repairs and Maintenance, Capital Reserves, Vacancy/Bad Debt Loss, etc.), however, a lot of the other information should be fairly east to obtain like the real estate taxes, insurance (call several brokers), landscaping/snow removal (call local investors to find out who they use).

Your best bet is finding someone local to your market and speaking to them what will be a good deal. 

Also, if you are still not finding deals that work. Are there areas within 100 mile radius that might bring better results?

Good luck and hope you can find your niche.