When it comes to real estate investing, you will hear about different rules and guidelines. Whether it is a real estate guide for beginners or a guide for experts – you will find this rule of thumb everywhere. Experts across the industry come up with these guidelines to help investors get the best out of their real estate investments. Most of these rules help investors avoid investing in properties that have negative cash flow, low occupancy rates, and other risks associated with income-generating real estate. In this article, we will talk about the 2% rule.
What is the 2% rule in real estate?
The 2% rule is a rule of thumb, which suggests that a rental property is a good investment if the monthly rental income is equal to or higher than 2% of the investment property price. For example, If a rental property you are considering investing in is listed at $100,000, then the rental income needs to be at least $2,000. Alternatively, you can use the same rule of thumb to determine your highest bid for that property by looking at the rental income. Say, the total rent is $4,000/month, multiplying this amount by 50 (deduced from the inverse of 2%), you will get the maximum price you can offer for this property price – $200,000.
Which Properties follow the 2% rule?
Naturally, not all properties will follow the 2% rule. However, this does exist in most of the US real estate market. However, exceptions do exist. As they say in real estate “location – location – location” many times the location of the investment property will determine the purchase price and how much rent the property would yield. In most cases, the 2% rule can be applied, and you will be able to achieve realistic values.
The 2% rule is followed by real estate investors who choose positive cash flow over property appreciation. On the other hand, if the property does not meet the 2% rule, it could still be an opportunity to invest for its potential for appreciation. So, before you start with your investment analysis, firm up your strategy, whether you are looking for long term gains like appreciation or short like gains like cash flow. This is where you will choose whether to follow the 2% rule or not.
What does it give you?
This tells us that there are no set rules for real estate investing. There are many factors that you need to consider when looking for investment properties. Is it possible to find an investment property that meets the 2% rule? Yes! But there are other considerations like expenses, vacancies, the type of property, etc. that need to be looked at before committing your investment dollars.
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