I have heard of these rules and have a basic understanding, but I still dont know the application of the the theory. Can some one explain how this will apply to an investment property? Please use an example as well....
Thanks in advance...
Ulrich!
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Ethan, Thank you. That explained it and the example was pretty clear. Thanks for the insight.
I am not a seasoned pro like others on here, but I understand this rule to mean that typically 50% of your gross rental income will be eaten up by taxes, insurance, common utilities, management, vacancy, repairs, reserves, etc. I am not sure if it is supposed to include mortgage payment or not. Anyone know?
The 2% part means you want to try to buy the property at a price such that one months rent is 2% of that price.
Example:
Price for a 3 family in Newark: 150k
Rental Income for One Month better be at least: 3,000
Honestly I don't believe this rule should be taken as anything more than a rule of thumb. I say this because, for example, in Ohio or Rochester there are TONS of properties that will comply with the 2% rule, but in reality this is not good enough considering what you're up against there. At the same time, in Manhattan, you will have an extremely tough time finding 2% rent to price ratio but some people don't care because they believe a rental in Manhattan will ultimately outperform over the long haul. And they may be right. So take it with a grain of salt.