What is the 2% rule?

The 2% rule in real estate is a guideline often used by real estate investors to quickly assess the potential profitability of a rental property. It suggests that the monthly rental income should be at least 2% of the property’s purchase price.

For example:

• If a property costs $200,000, it should ideally rent for at least $4,000 per month ($200,000 x 0.02 = $4,000). The 2% rule is intended as a very rough initial filter to weed out properties that are unlikely to generate sufficient cash flow. It helps investors quickly identify potential deals for further, more detailed financial analysis, but it’s not a comprehensive investment strategy on its own.

a. How realistic is the 2% rule?

The 2% rule, while a simple screening tool, is often unrealistic in today’s real estate market, especially in high-cost-of-living areas like many parts of Lane County. Achieving a 2% rent-to-price ratio means finding properties that rent for a very high percentage of their purchase price.

• Challenging in Strong Markets: In desirable markets with high property values and strong appreciation (like Eugene), rental yields (the ratio of rent to price) tend to be lower. It’s difficult to find properties that meet the 2% rule without being in a distressed condition or in a significantly undervalued area.
• Ignores Expenses: The rule only considers purchase price and gross rent; it completely ignores crucial expenses like property taxes (which can be substantial in Oregon), insurance, maintenance, vacancies, and property management fees.
• Better for Distressed Markets/Properties: The 2% rule might be more achievable in very low-cost or distressed markets where property values are low but rental demand remains relatively stable. It can also apply to properties purchased significantly below market value. While a nice target, a more common and realistic target for cash flow investors in many markets is closer to the 0.7% to 1% rule, after accounting for all expenses.