What is the “50% Rule” for rental properties? The basics for real estate investors.

The 50% and 2% rules for real estate investors.

When you or your clients come across the 50% and 2% ‘rules’ they really are simple enough to understand. These are going to be simple kind of in your head math calculations to give you ballpark answers, and are best explained using examples.

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Let’s get started…

These are ‘rules’ used in real estate as guidelines for a couple of items, and to be used as quick references in basic fast mental math.

The 50% rule.

The 50% rule is basically a guide for keeping investors out of the red (in a deficit) on their bottom line. It’s a conservative way of guesstimating costs as an owner on a rental property.

The 50% rule as an example:
If you’re going to be charging $1K in rent each month, by logic of the 50% rule, $500 of that would go towards external expenses outside of the mortgage payment. (repairs, insurance, taxes)

So this is a quick way to evaluate rental properties just look at how much rent comes in and divide that by two because for the first years you will be lucky to get HALF of the rent as cash flow.

The 2% Rule

The 2% rule is a little bit different than we’ve talked about in our other lessons (how much rent can you charge?) but it’s a good mental math go to for a quick answer.

The 2% rule example;

By the logic of the 2% rule, a property that cost you (as the investor) $100K should bring in $2K a month in rent. Now obviously this isn’t always the case, and the range is more like .8% to 1.2%, but there are some areas that the 2% rule is more applicable.

We have talked about using the Indiana State Fairgrounds and surrounding areas to find good 2% properties that we have been buyer and selling for years.

A different way to use the 2% rule.

Some investors say that the 2% rule in reverse can be used as a means to estimate the purchase price of a property.

Here’s an example:

If you know a property has a monthly rent of $2,000 a month and your target is to acquire only 2% houses then you would know that the purchase price of that property should not exceed $100,000.   Again, this won’t work and apply to all areas, but as a quick mental math starting point reference.

Explaining yourself is easier

If you do this and take this high cash flow approach, then you won’t be in the gray area anymore about deals you will be able to tell everybody on your team, any realtors or investors you talk to and any sellers/buyers that you talk EXACTLY what your criteria is for buying a property and people will be sick of hearing: “I need 2% properties.”

But they will know who to call about them when they find them.  If you are after cash flow and these kinds of cash flow properties then you can do the math easily.

Conclusion:

The 50% Rule is a pretty solid one, whether you manage the rental yourself or a professional property management team does, it is a safe and good conservative bet that you not “keep” more than 50% of the rent as cash flow, at least for the few years.

Also understand that a 2% means the market rent is 2% of the purchase price.  Also refer to our math class to get better at doing math in your head.

Some helpful places:

Photo Math Calculator– free calc for apple that allows you to take pics and do math from your pics.

Calcbot 2 – free app for use on apple that has conversion tables ready.

Calc+ – for Android is a free app that is highly rated for Android users.

Thanks everybody!

~ Indy Anna