The 2% Rule Paints With Far Too Big A Brush

The 2% rule bothers me because I think it's far too restrictive. Basically, it paints with too broad a brush. According to Gary Keller in The Millionaire Real Estate Investor, the national average rent/cost is 0.7%. Beating that three times over is not going to be easy.

The problem, of course, is not that it's hard to do this, but that focusing on 2% will push investors to do unwise things; namely invest in war zones where they get 2% but only a paper, or investors will hire subpar contractors or do subpar rehabs. Lord knows investors don't need any worse of a reputation in this area.

We have gotten 2% rent/cost before, mostly in the lowest quality areas we invest. But in solid working class/lower middle class areas, we settle for 1.5%. And in the nicest areas we go, we'll even go down to 1.3%. 

For one thing, a property you're all into for $20,000 that rents for $400 will not cash flow as well as a property you're all into for $40,000 that rents for $800 even though the ratio is the same. The fixed costs of maintenance, turnover and what not outweigh the more variable costs of taxes and debt service. Insurance can even have an inverse relation to price.

We classify areas by what kind of rent/cost we can tolerate there, and of course we try to do better. But making 2% a hard rule is a bad idea in my judgement; It will lead you into warzones with bad contractors at your side.