What Is the 2 Rule in Real Estate and How Does It Work?

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Written By Tommy

DealBloom aims to share the latest tips and strategies to help realtors, brokers, loan officers, and investors navigate the world of real estate.

When it comes to real estate investing, you’ll come across tons of “guidelines” and “rule of thumbs.” For instance, the 2 rule. But what is the 2 rule in real estate exactly, and how does it work? Here’s everything you need to know about the 2 Rule in real estate: what it is, how it works, and whether or not they are right for you.

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What is the 2 Rule in Real Estate?

What is the 2 rule in real estate? The 2% rule is a guideline for real estate investors to follow when considering the purchase of an investment property. The 2% Rule states that a rental home is a good investment if the monthly rent is 2% or more of the total cost of the property.

The 2% rule is the rule that investors follow to determine if the monthly rental income from a property they plan to purchase is high enough. To invest in a good rental, the rent should be equal to or greater than 2% of the cost of the home.

To determine if a property is worth investing in, you should divide its monthly rental price by its purchase price. If the number you get is less than 0.02, the property investment doesn’t meet the 2% rule. This means that you won’t get enough income from it.

When investing, the goal is always to make money. But you will only make that money if you understand and follow the rules of real estate investing.

Experts created the 2% Rule to help you make the best decisions when buying rental properties. 

Are there Properties That Meet the 2% Rule?

There’s no definitive answer to this question, but in general, the “2% rule” in real estate refers to the idea that a rental property should generate income that’s equal to or greater than 2% of the property’s purchase price.

For example, if you’re looking at a rental property that costs $200,000, you would expect it to generate at least $4,000 in rental income each year ($200,000 x 0.02 = $4,000).

Of course, there are a lot of other factors to consider when evaluating a rental property, but the 2% rule is a helpful starting point.

If you’re considering investing in rental property, be sure to do your homework and talk to a professional before making any decisions.

Why the 2% Rule Is Important for Investors

The 2% rule is a rule that helps determine how a property is likely to produce a good, positive cash flow. It reveals how much you can expect from the property and the price at which you should sell it. It tells you whether the property is a good investment or not.

Specifically, this rule helps you determine how much cash you can expect from your property each month. Real estate experts say that properties should generate 2% of their initial price in monthly income to be worth buying.

If the home you plan to purchase has the potential to fulfill this criteria, then it could be a good real estate investment. However, remember to factor in all the additional costs of owning a rental, such as maintenance, repairs, and taxes.

You should also consider any difficulties you may face with property management, such as locating and screening potential renters, setting security deposits, and collecting rent.

When Not to Use the 2% Rule

Many real estate professionals these days disregard the 2% rule.

Properties that meet this rule are usually in less desirable areas. And to meet this 2% requirement, the property should be on the cheaper side. Sometimes investors will pay more for a property because it’s cheaper but more on maintenance.

We do not recommend buying homes that meet the 2% rule. This is because such homes are in very poor condition and are located in class D neighborhoods.

Despite the concerns, some investors can still use the 2% Rule as a helpful tool under the appropriate conditions.

Are there Any Drawbacks to Adhering to the 2 Rule?

While the rule of 2% can help you determine a healthy rental to property value ratio, this rule does not stand alone as the key determinant of a profitable investment.

There are a few downsides to the 2% rule:

  • Rent to value ratio only tells you how much you can expect to profit from a rental property. It doesn’t tell you anything about the overall potential for the property.
  • Do not include other costs, such as mortgage payments, closing and settlement charges, maintenance costs, insurance premiums, property taxes, etc.
  • Do not mention anything about the condition of the home, its location, its rental history, its return on investment, the cap rate, or its expected value.
  • Unfortunately, you may not be able to follow this rule in most cities. If you want to do that, your two options are to buy in more areas or lower your criteria (0.8%).

Can Anyone Achieve Success With Real Estate by Following the 2 Rule Alone?

The 2 rule in real estate is pretty simple: don’t buy unless you’re prepared to hold the property for at least two years. This rule protects investors from making impulsive decisions and helps them think long-term.

Of course, there are always exceptions to the rule – if you’re 100% certain that a property will appreciate significantly in value within two years, then it may be worth taking the risk. But in general, the 2 rule is a good way to avoid making mistakes in the volatile world of real estate.

So, can anyone achieve success by following the 2 Rule alone?

The answer is yes – but it takes discipline and patience. If you’re the type of person who is always looking for a quick profit, then real estate investing is probably not right for you. But if you’re willing to take a more measured approach and hold onto investment properties for the long haul, you can certainly make a lot of money in this business.

Of course, there’s more to success than just following the 2 Rule. You also need to know how to find good deals, negotiate with sellers, and manage your properties properly. But if you can master those skills, then the 2 Rule will be your foundation for success in real estate.

Frequently Asked Questions

How realistic is the 2% rule?

The 2% rule is a guideline for real estate investors to follow when considering the purchase of an investment property. The rule states that the monthly rent should equal or exceed 2% of the property’s purchase price. While this rule is not set in stone, it can be a helpful guide for investors when making decisions about which properties to purchase.

What is the 1% rule in real estate?

The 1% rule is a guideline that states that an investor should expect to generate a return of 1% on their investment for every $100 that they spend on a property. The 2% rule is a similar guideline that states that an investor should expect to generate a return of 2% on their investment for every $100 spent on a property.

What is the 50% rule in real estate?

The 50% rule in real estate is that investors should expect to spend about 50% of their gross income on housing expenses. This includes mortgage payments, property taxes, insurance, and other associated costs. The other 50% of income would be used for living expenses and savings.

Conclusion

What is the 2 rule in real estate? The 2% rule is a guideline that investors follow when purchasing rental properties. The 2% rule says a rental property is a good deal if the monthly rental income is 2% or more of the purchase price. The 2% rule can help real estate investors quickly evaluate potential investment properties. You can determine if a property is worth investing in by doing some quick math.

 

Tommy