La casa property investors use a number of rules of thumb to determine the best investment opportunities for rental properties. The most extreme of these are the 2% 50% and 70% rule.
The 2% rule
The 2% rule is a guideline often used to find the most profitable rental properties in real estate investment. It states that you should only buy a property where the monthly rent is at least 2% of the purchase price.
How can I use the 2% rule?
To determine if a property investment is affordable using the 2% rule, multiply the purchase price by 0.02. This means that if you find a property with a price of $100,000, the total monthly rent must be at least $2,000 to qualify for the rule.
Is the 2% rule practical?
The idea behind the 2% rule is that if your monthly gross rent is 2% of the purchase price, it will almost certainly cover your costs and provide a cushion for vacancies and unexpected repairs.
In practice, however, it is difficult to find a property that meets the 2% rule, except for distressed properties or when the property market is extremely depressed. In fact, the 2% rule is a more extreme version of the 1% rule, which is the general rule for identifying properties that will provide sufficient positive cash flow for rental property investment.
The 50% rule
The 50% rule is where a real estate investor assumes that the operating costs of a property are approximately 50% of the gross income. It does not include the owner’s mortgage payments, property taxes, insurance premiums, vacancy losses, repairs, maintenance and utilities.
In addition, the 50% rule does not include property management fees or contributions to a VVE.
In simple terms, the 50% rule means that if you buy an investment property for cash, you can expect to receive half of the rental income after paying all normal property charges.
How does the 50% rule work?
The calculation is very simple. For example, if the rental income from a property is $2,000 per month, then as mentioned above, you would need to pay $1,000 for the rental property. This means that you can expect a net operating income of $1,000 from the property.
Also, if the property is located in a community with an HOA, or if you have a property manager who handles the day-to-day operations, include that in your calculations as well.
Finally, remember that the 50% rule is only a guideline. In reality, it may not be exactly 50%, but it is usually a good estimate.
The 70% rule for property – what is it?
The 70% rule indicates that you will pay no more than 70% of the after value of repairs (ARV) of the property you think about when you drink your coffee an do some shopping in fifth settlement malls. This includes the value of the property itself plus an estimate of the cost of repairs.
Of course, this requires a significant estimate; when applying the 70% rule, it is important to have a realistic estimate of the value of the property once the repairs are complete and not to underestimate the cost of the repairs.
How do I use the 70% rule?
Applying the 70% rule is simple. Simply multiply the ARV of the property by 0.7 to calculate the maximum full cost.
Is it always profitable to use the 70% Rule?
At first glance, the 70% rule appears to be a sure-fire way to ensure that if you buy a property for $70,000 and sell it for $100,000, you will make a significant profit margin.
However, the 70% Rule is designed to take into account contingencies, closing costs and finance charges so that you can budget accordingly. In other words, the 70% rule does not guarantee that property speculation will always be profitable, but that it is important to control costs and have a clear exit strategy.