Advertiser Disclosure

advertising disclaimer
Skip to main content
For rent sign

What Is The 2% Rule In Real Estate?


[Updated: Dec 21, 2020] Jan 14, 2020 by Matt Frankel, CFP
Get our 43-Page Guide to Real Estate Investing Today!

Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide.

*By submitting your email you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.

Real estate investors use several rules of thumb to identify the best rental property investment opportunities. The 2% rule is perhaps the most extreme.

What is the 2% rule in real estate?

The 2% rule is a guideline often used in real estate investing to find the most profitable rental properties to buy. The idea is to only buy properties that produce monthly rent of at least 2% of the purchase price.

what is the 2% rule in real estate

Click to enlarge

How do I use the 2% rule?

To use the 2% rule to determine whether a real estate investment is a good deal, multiply its purchase price by 0.02. So, if you find a property listed for $100,000, it would need to generate at least $2,000 in monthly gross rent to satisfy the rule.

Conversely, you can use the rule to determine how much you should offer on a particular rental property by multiplying by 50 (the inverse of 0.02). For example, if you find an investment property that currently earns a monthly rent of $4,000, the 2% rule says that you shouldn't pay more than $200,000.

Is the 2% rule practical?

The idea behind the 2% rule is if a property generates gross monthly rent of 2% of the purchase price, it's almost certain to generate enough money to cover its expenses as well as provide cushion for vacancies and unexpected maintenance.

However, it can be difficult to find properties that conform to the 2% rule in practice, unless you're buying a very distressed property or the real estate market is extremely weak. In fact, the 2% rule is simply a more extreme variant of the 1% rule, which is the more common rule used in rental property investing to identify properties that will produce enough positive cash flow.

Real estate investors tend to use multiple rules of thumb when evaluating properties. To learn more, check out the following articles:

What is the 70% Rule in Real Estate?

What is the 50% Rule in Real Estate?

11% of the mega-wealthy swear by this investment…

The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1.

If you, too, want to invest like the wealthiest in the world, we have a complete guide on what you need to take your first steps. Take the first step toward building real wealth by getting your free copy today. Simply click here to receive your free guide.

The Motley Fool has a disclosure policy.