What is 2% Rule in Real Estate Investment?


You may be often coming across several rules and guidelines if you are a real estate investor which are there to help you effectively and make a profit in your investment by  housing market crash. Many of these rules are extremely important and very useful for the investors in order to avoid properties that have negative cash flow as well as low occupancy rates and have other risks. However, you need to determine whether every rule applies you or you can ignore some rules. Get in touch with ÉquipePapachristouin order to determine which rule you should follow and which to ignore to ensure the best deal in your real estate investment.

The 2% rule in the reals estate investment is one of the most important, essential and useful rule which determines that the rental property should be a good investment provided your monthly rental income is higher than or equal to 2% of the price of the investment property. For instance, if you have bought the rental property for 200000 USD you should be getting the rent at least 4000 in order to meet the 2%. Similarly, if your rental property has 50000 purchasing cost the 2% should be at least 1000 USD.

However, even the 2% rule is not followed or applicable for every investment and in all real estate market. The 2% rule visibly exists and strictly followed in real estate markets particularly in the south US and mid-west real estate market whereas in places like Denver, Los Angeles, Boston etc. the 2% rule is not given much importance. This happens because the location of the property usually determines the purchase cost as well as the rent. Therefore, if you follow the 2% rule in Memphis, it will be realistic and achievable, but the same may not be practical in Los Angeles.

The real estate rule is used by investors when they search for positive cashflow instead of appreciation. However, if an investor does not use the 2% rule, it is not considered as the end of the business or ruin in the investment. The investment can still be in operation and considered opportunity in the real estate business. Therefore, using the 2% rule exclusively depends upon the real estate investor. If you are a real estate investor, you need to determine while analysing your investment what you want to get from your investment and are you looking for long-term gains i.e. the appreciation or short-term gains such as the cash flow.

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