WHY THE 2% RULE FOR REAL ESTATE DOESN'T MATTER

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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. For example if the purchase price of a property was $100,000, then the minimum monthly rent to meet the criteria would be $2,000.

Where did the 2% Rule Come From?

The 2% Rule is a repackaging of the Gross Rent Multiplier or GRM. The GRM is essentially another way of saying how many years it would take to pay off the asset with 100% of the gross rents.

Challenges with the  2% Rule

It is not an immutable law for investing. Because assets are typically priced according to their expected income and risk, the ratio of expected rent income compared to purchase price raises as the quality of the asset drops.

How NOT to Use 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 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.

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