What Is The 2% Rule and 50% Rule?

2 % Rule

The 2% rule is a quick way to determine if a property is worth pursuing further. The 2% rule takes the rental value divided by the purchase price multiplied by 100.

Negative Cash flow= 0-1%

Positive Cash flow= 1-2%

Positive Cash flow= 2% +

Example: A single family home was purchased for $180,000. The rental value is listed at $1500 a month.

$1500/180000=0.8%

The rental property has a 2% rule of 0.8%. The rental property will have a negative cash flow.

Example: A single family home was purchased for $120,000. The rental value is listed at $1300 a month.

$1300/120000=0.18%

The rental property has a 2% rule of 0.18%. Most likely the rental property will have a positive cash flow.

50% Rule

The 50% rule is a quick way to determine the cash flow and expenses of a property. The 50% rule takes the rental value divided by 2 subtracted by the mortgage. The 50% rule assume the operating expenses is half of the rental value. Operating expenses include taxes, insurance, utilities, capital expenditures, maintenance, vacancy and other expenses.

Example: A single family home has a rental income of $1500. The mortgage on the rental property is $550 per month.

$1500/2= $750

$750-$550=$200 projected positive cash flow

Example: A single family home has a rental income of $1500. The mortgage on the rental property is $775 per month.

$1500/2=$750

$750-$775= $-25.00 negative cash flow