I can’t remember exactly when I joined, but I’ve been a member of BiggerPockets for close to 2 years now, and I’ve been contributing to the blog for almost a year. A lot of things have changed on BP in this time, but one thing never changes – at least once a week month a newbie wants an explanation of 2% rule, 50% rule, or some other rule…
Here’s The Problem
These rules should not be used by beginners and should be reserved for highly seasoned people.
Why – because these rules are not rules, they are, at best, guidelines, and application of these guidelines presumes many caveats which seasoned people know while beginners may not. As such, these rules can be quite misleading, and focusing on the is a mistake.
Take the 2% Rule, for example, which stipulates that monthly Gross Rent should be approximately 2% of the value (purchase price) of the asset. This would mean that if you paid $100,000 for a 4-plex with total gross income of at least $2,000/month you’d be in good shape, since $2,000 is 2% of $100,000. Let’s look at this…
Two Buildings:
Let’s consider two 4-plex buildings. Both can be purchased for $100,000. One brings-in $2,000/month of gross and thus falls in-line with the 2% rule. The other brings-in a whopping $2,400/month gross, which is 2.4% against the purchase price of $100,000 – you know you’ll be good with that one! Well, may be – let’s consider these:
4-Plex #1:
This building brings-in $2,000/month of gross. Electric and Gas are separately metered and passed along to tenants. The building has a simple gable roof with 6/12 pitch and …read more