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Real estate investors use several rules of thumb to identify the best rental property investment opportunities. The 2% rule is perhaps the most extreme.
What is the 2% rule in real estate?
The 2% rule is a guideline often used in real estate investing to find the most profitable rental properties to buy. The idea is to only buy properties that produce monthly rent of at least 2% of the purchase price.
How do I use the 2% rule?
To use the 2% rule to determine whether a real estate investment is a good deal, multiply its purchase price by 0.02. So, if you find a property listed for $100,000, it would need to generate at least $2,000 in monthly gross rent to satisfy the rule.
Conversely, you can use the rule to determine how much you should offer on a particular rental property by multiplying by 50 (the inverse of 0.02). For example, if you find an investment property that currently earns a monthly rent of $4,000, the 2% rule says that you shouldn't pay more than $200,000.
Is the 2% rule practical?
The idea behind the 2% rule is if a property generates gross monthly rent of 2% of the purchase price, it's almost certain to generate enough money to cover its expenses as well as provide cushion for vacancies and unexpected maintenance.
However, it can be difficult to find properties that conform to the 2% rule in practice, unless you're buying a very distressed property or the real estate market is extremely weak. In fact, the 2% rule is simply a more extreme variant of the 1% rule, which is the more common rule used in rental property investing to identify properties that will produce enough positive cash flow.
Real estate investors tend to use multiple rules of thumb when evaluating properties. To learn more, check out the following articles:
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