Why The 2% Rule for Real Estate Doesn’t Matter

The 2% rule is a screening criteria for real estate that says the monthly income from rent should be at least 2% of the value of the property.

What is the 2% Rule?

The 2% Rule is a repackaging of the Gross Rent Multiplier or GRM. The GRM is defined as GRM = Purchase price / Gross Rents.

Where did the 2% Rule Come From?

I spent a minute or two looking at what is currently available in this area. Which is really how a screening tool should be used. Taking a list of properties and quickly going through them to decide if they are worth further review.

Example of using the 2% Rule

Neighbourhoods where property management is difficult are usually ones where you will have trouble finding tenants that meet industry standard screening criteria at anything close to the median rent of the neighbourhood.

Challenges with the 2% Rule

Do not use the 2% rule as the end all be all for underwriting of an income property. It will leave you making questionable decisions.

How NOT to Use the 2% Rule

You can use the 2% Rule as a screening criteria to weed out properties that do not match your model(s). There are thousands of properties available in most markets, and running full underwriting on every property is not feasible.

How to use the 2% Rule