It’s got nothing to do with milk, and you don’t have to drink 2% if you don’t want to.
Just kidding, sort of.
This rule is not an end all, be all. You don’t have to abide by this rule or your rental property will fail. It’s a rule of thumb that many use – and we use it to know our property kicks ass as an investment. I think the 1% rule is plenty.
The 2% rule says that the rents from your property should be equal to 2% of the purchase price. It’s a quick and dirty guideline to analyze a property’s potential to cash flow in seconds. A $100,000 property should have $2,000 gross rents. That’s crazy, isn’t it? Almost useless.
We don’t use this rule much. You can see what we use here:
If I were to use a rule like this, I’d probably say 2% of the loan rather than purchase price. So if you look at our triplex, for example. Purchase price – 129k. Loan 100k. Gross rents 2100. Yep, that’s a good deal! Cash flow numbers work too at ~$300/unit/month.
The 2% rule related to purchase price is a bit insane. If you find that deal, buy it immediately. 2% of loan amount AFTER down payment is still a great guideline and the numbers look good! Unless you use the BRRR strategy, where you wouldn’t have a down payment and you’d be at the pinnacle of real estate investment.2