The 2% rule - how close do you stick?

[Nathan Shankles]

I bought my two investment properties about 8 years ago and at that time hadn’t heard of Th e 2% rule. When I recently learned of it, I went and did the math. Each of my properties falls between 1.3 and 1.6%. I’m wondering what seasoned rental property investors aim for when it comes to the 2% rule. Do you look for 2% or better? 1.5% or greater? Between 1 and 1.5%?

[Will Barnard]

Some of these posts are comical. For CA, anything in the 1.5% range is a heck of a cash flow deal and not easy to find, more often, created. People need to realize that the 2% rule, 1% rule, etc are not Rules at all, merely guidelines meant as a quick back of the napkin analysis. Your purchase decision needs to be made on a full due diligence of the numbers, the property, the market condition,s your goals, strategy, etc, etc. . . .

Any property in this country meeting a 2% rule at purchase is going to be a lower end property likely in a c- or worse area and likely not offer much in the way of appreciation. Ultimately you need to decide for yourself what kind of landlord and investor you want to be. Buying properties for $10k in some states in low end, high crime areas will require some heavy managerial responsibilities and difficulties, legal issues on evictions, etc. These properties may cash flow much larger on a % basis but only you can decide if the risk, time and headaches involved in that asset are worth it for you and your goals.

1% in many areas of different states will equate to break even or even cash negative whereas in some places, may provide small cash flows. In Los Angeles, a single family 3+2 1500 SF standard home built in the 50's is going to run you at least $300k+ (and many areas it will be $500k+) in most areas and is likely not going to bring you $3k+ in rent. The desert cities like Bakersfield and Fresno, parts of the Antelope Valley, etc can find deals in the 1.5% range but they are typically homes that are purchased for sub $200k and not in appreciating areas or in good neighborhoods.