Before investing in rental real estate, make sure to see how the 2% rule applies to that property you have your eye on. According the 2% Rule, the rent on a property should equal 2%, at minimum, of the purchase price.
This simple guideline is a necessary step for determining a proper rental amount to turn a profit. Use it to see if the property is worth checking out. Here is the 2% Rule basic math:
Monthly Rent x 2% (minimum) of Purchase Price = Profit
Here is the 2% Rule in number sentence form for a $300,000 home:
$250,000 x .02 = $5,000
Applying the 2% Rule to the above means the home’s mortgage should be $5,000 or less per month, and the monthly rent should be a minimum of $5,000.
Is the 2% Rule the real deal? That depends. It may be a stretch in the wild-ride rental markets of New York City or California’s San Francisco-Oakland Bay area. For steadier markets, the 2% Rule serves as basic prescreening tool for the viability of an investment property.
Needless to say, other factors are to be considered, such as the area’s median rents. Trying to rent a home for $5,000 a month while comparable homes go for $2,750 would be a hard sell for even the most seasoned real estate professional. A good property management company can assess other factors—maintenance, operating expenses, and so on—influencing rental prices and can help you arrive at the best rental rate for your property.
If the 2% Rule sounds familiar, it may be because it is the same as the 1% Rule but more intense with doubling the monthly rent. Neither one is a hard and fast rule. Look at them as tools to help you sift through properties for further scrutiny.
Want to learn more about investing in rental properties? Place Tenants can help. Call 800-886-1193 or email [email protected].
iStock/Perawit Boonchu
