Is the 2% Rule Really that Important?

Let me preface this by saying that rules, in general, make me a little upset. I get that they have a purpose, and they provide a guideline, and they’re often a good starting point for investors who are new to the biz. But the problem that I see with rules is that people think they HAVE to follow them. And investors are some of the worst about thinking this!

One of the most commonly referred to rules in real estate investment is the 2% rule. Basically, this rule states that the income you make off a property should be at least 2% of the purchase price. For example, if you buy a home for $50,000, you should be able to charge $1,000/month in rent (because $1,000 is 2% of $50,000). According to this rule, if a property meets this criteria, it’s a good deal and you should buy it.

Except going off of this rule alone would be really stupid.

Why? Because there are about a thousand other factors that aren’t being considered by the 2% rule! The location of the property, the condition of it, whether or not the local market is growing, the other costs associated with the property - NONE of these are taken into consideration with the 2% rule, yet all of them are extremely critical factors in determining a potential investment worthiness.

Plus, the 2% rule is usually drawn off estimated figures, not actual numbers. Once you start adding everything up and running a few calculations, you may find that a property that initially met the 2% rule no longer does once you’ve put some more solid figures into the equation.

Now, I know there aren’t a lot of investors out there who treat the 2% rule like it’s the end-all, be-all in purchasing real estate. Most folks won’t buy a property just because it meets the 2% rule - or I hope not, anyway. However, this rule IS given a lot of weight (more than it deserves, in my opinion), which leads me to the question at hand, and the whole purpose of this post.

Is the 2% really that important?

The answer is no, it is not. What I’ve come to realize over my years in real estate is that all the investment “rules” you hear about just don’t apply in a lot of situations. There are too many variables, and every investor’s circumstances are unique. These factors alone make it extremely difficult to assign hard and fast rules that shouldn’t be broken.

I’m not saying that you should ignore 2% rule altogether, or that it doesn’t work as a okay starting point when you’re first evaluating a potential investment. But I am saying that you shouldn’t base your purchasing decisions off of this rule, because there are plenty of instances where it just doesn’t add up.