2% Rule
A more aggressive screening guideline stating that monthly rent should be at least 2% of the purchase price.
Definition
The 2% Rule suggests that a property's monthly rent should be at least 2% of the purchase price - for example, $4,000 per month on a $200,000 property. Properties meeting this threshold are rare in most markets and are typically found in lower-income areas with higher management intensity and risk. While the 2% rule almost guarantees strong cash flow, these properties often come with higher vacancy, maintenance costs, and tenant turnover. The rule works best as a way to identify cash-flow-heavy markets but should never replace thorough due diligence on individual deals.
Related Terms
Rent-to-Price Ratio
Monthly rent divided by the property price, used to quickly evaluate cash flow potential.
Cash Flow
The net money remaining after all income is collected and all expenses and debt payments are made.
Cash-on-Cash Return
The annual pre-tax cash flow divided by the total cash invested, measuring the return on actual dollars deployed.
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