Property Management

What to Know about the 2% Rule when Buying a Rental Property

By August 6, 2020 No Comments

When you decide you want to buy a rental property, there are several things to consider. The 2% rule is one of those things you should be looking at before you decide to move forward with the purchase.

What is the 2% Rule?

Basically, the 2% rule says, if you spend $100K on a property, you should rent it out for $2,000 or more. The 2% rule states you should rent any property you buy for 2% of the purchase price or more.

By charging 2% of the purchase price in rent, you’ll have the ability to make a good return on the property, in theory. It can be difficult to find properties that fit this rule, however. Just like most other rules, it can be broken, but it should still be used as a guide.

A Few Issues With the 2% Rule

While the 2% rule is very useful, especially when you’re looking at many deals and need to make quick offers, it doesn’t come without flaws. Some of the issues with the 2% rule include:

  • Many deals in poor locations might meet the 2% rule, but might not be a good investment
  • Older properties not in great condition may also meet the rule but could hurt long-term cash flow
  • The rule doesn’t consider cash flow or expenses

While the 2% rule can certainly help you eliminate overpriced properties, it can also put you in a bad home for resell value. The best neighborhoods are typically harder to find properties fitting the 2% rule.

Should You Use the 2% Rule?

Yes and no. Depending on where you’re located, it might not be difficult to find properties fitting the 2% rule. However, in some areas of the country, it’s likely impossible to find a rental property fitting the 2% rule in a decent neighborhood.

Many investors use the 2% rule as a guideline, and not the end-all, be-all. It can help you eliminate grossly overpriced properties and help ensure you make money from our investment. However, there are other things to consider outside of the 2% rule.

This rule can help you spot the best rental opportunity in a good neighborhood, however. If you have five properties you’re considering, look at which one comes the closest to the 2% rule with the rent you can charge.

The property renting for the price closest to 2% of the purchase price is likely the best investment. However, you still have to consider the condition of the property and the age.

Is it Still Possible to Use the 2% Rule?

Some properties will meet the 2% rule, but they are harder to find, especially in states like Florida. It’s also important to note, properties fitting this rule in Florida will likely not provide the same profit due to the higher home insurance rates and taxes compared to some other states.

Before you start thinking you have to use the 2% rule to make a profit, make sure you’re considering all the factors. The resale value is important, along with the condition of the home, the age of the home, and the location.

The 2% rule should be used as a guideline. It’s not as easy to find properties fitting this rule anymore. However, it can be helpful to eliminate properties not even coming close.