What is the 2% rule in real estate? In real estate investing, the best way to increase the potential return is to buy low, fix it up, rent it out for a profit, and then sell it high. Why is this different from investing in the stock market? Basically, in the stock market, you want to buy something and make money that day, but , it's more of a wait and see approach.
The 2% rule is a simple, basic rule of thumb that suggests that an investment property is an excellent investment if the net monthly rental revenue is less than 2% of that investment property's total value. The monthly income must be at least that, and the monthly rental revenue must be above that as well. For this simple rule to work, the income and the rental revenue should be fairly steady, otherwise the investment property analysis would fail the test. This is how real estate investors make their money... they wait and they see.
To summarize: If the total gross value of the property is less than two percent of its total purchase price, this is considered a good investment and the monthly rent should be at least two percent of that price. So if your monthly rent is two hundred dollars, then you would consider the purchase price to be one percent of that monthly rent, therefore, this would be considered a bad investment and you would most likely lose money on the deal. On the flip side, if your monthly rent is twenty dollars an hour, and the total purchase price is two thousand dollars, then you would consider the purchase price to be three percent of the monthly rent, therefore, this would be considered a good investment and the monthly rent would be close to twenty dollars an hour. As you can see, this simple rule can help you greatly in determining if the property is considered a good investment or not. In order to get this information, you will need to contact a real estate investment professional, who can help you understand what the various percentages are for different types of properties.