Everywhere you go you are bound to some rules and regulations that you ought to follow. As said by many, Even animals have their own rules and regulations, which when broken, ruthless aggression is the punishment. Like in a pride of lions, only one male has the mating rights of all the lionesses. If another male lion oversteps his authority, a fight is bound to take place.
In the same way, real estate is also governed by certain rules and regulations. The rules are not set to protect the kings of real estate but rather to create a favorable but profitable and ethical business environment for starting and growing property business.
If you are in the real estate business, you have probably heard of the 2% rule. If not, here is everything you need to know about it.
This is one of the rules of thumbs in real estate that help investors in growing their property business. The rule states that for a rental property to be a successful investment, the monthly rental income should be equal to or higher than 2% of the price of the property investment.
For example, if a property investment is worth $300,000, the rental income should be equal to or more than $6,000.
Although this real estate rule is named the 2% rule, it is more of a guideline. Some people categorize it as one of the many real estate myths.
To answer the question of whether it is useful, the 2% rule only helps you to determine the rent to price ratio. It also is one of the crucial steps to cash flow investors follow. However, the rule fails to include some crucial factors in property investment such as the location of a property, the net rental income, the cap rate, cash on cash return, and property appreciation.
Therefore, this rule might not be useful if you do not include other factors as well.
Several experts dismiss the 2% rule as an accurate and helpful rule of thumb and advise that the rule should be ignored. Others say that the rule is not detailed and too restrictive to apply in today’s real estate market.
Investors also note that properties that can follow the 2% rule mostly exist in areas that are not best suited in growing a property business. Additionally, to make the rule apply elsewhere, the property price should be low. However, cheaper properties have higher maintenance expenses, and thus, an investor will end up making more losses.
Generally, the 2% rule in real estate is a good guideline to measure the rental income to property ratio. It is something to keep in mind when growing a property business but should not be noted as a “follow or die” rule. If you are also looking to buy a property, always do a thorough inspection first to make sure you are getting value for your money. After inspection and other factors pass, you can add the 2% rule as a measure of the integrity of a property.
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