The 2% rule is a quick calculation that claims if a property’s monthly rent is more than 2% of the purchase price then it is a good deal.
I’m here to tell you…
Sometimes a 2% Rule Ain’t a 2% Rule
Let’s use some simple numbers as an example. Say you find a property for $50,000 that will rent for $1,000 a month that is in a “rougher” part of town.
On paper the deal looks great. You factor in your “standard” allowances for vacancy, turnover, maintenance, etc. and you have yourself a real money maker.
Or do you?
Not everything is one size fits all when it comes to cost allocations and what you factor in for an “A” neighborhood may vary from what is needed for a “D.”
This is where many people get caught up. They jump into a property like this and suddenly realize their estimates are way off as the property has a bit more “drama” than there others.
The cost to turnover a tenant is an example. You can have instances where there is very minimal to do because the property was taken care of as someone would with a home.
Then there is the instances where you need to replace a lot. New carpets throughout, paint throughout, repair cabinets, bathroom tile professionally cleaned, drywall repair and so on.
Yes, this is what you collect a deposit for, but that $1,000 worth of one-month rent dries up real fast with just one or two of the above items. Anything above that is cutting into your overall cashflow.
Also, the frequency of turnover may possibly be higher which means spending on these costs more often.
With the example above you can see how just relying on the 2% rule alone can get you in trouble and land you a worse return than may come with a property with a 1% rule.
The point is we need to pay mind to the bottom line of our investment. There is nothing wrong with investing in “rougher” neighborhoods, just be sure you are allocating your costs appropriately.
Remember, there are pros and cons to every area and every property. We just need to be realistic about what those are and what we are willing to take on.
Be sure to use the online property calculator to run the numbers on a home. Get access here: Property Calculator
For a blueprint on how to make money with rental properties grab a copy of ScaredyCatGuide to Investing in Rental Properties.