What Is The 2% Rule In Real Estate? Should Everyone Use It For Profitable Investments?
Investors in real estate use various rules, which help them organize their business and make the most benefit from it. A 2% rule is one of the main principles, which can be applied by businessmen. With the help of it, it’s much easier to define, whether a property is worth investing in. Today we will observe the issue of this rule of thumb and find out how you can use it in real life.
The essence of a 2% rule real in estate
It is otherwise called “The rule of thumb”. It’s used along with the other popular rules, applied in the property investment sphere. This guideline can be used by experienced investors and newcomers. Not all potential investors understand, however, what it means and whether they should follow it. The idea is as follows.
When you are not sure about investing your money in this or that real estate object, apply a 2% guideline. Look at the purchase price and the monthly rent: the monthly net rent should be at least 2% of the total purchase price to be potentially interesting. Such property will be worth investing in (surely, the more the percentage is the better).
Look at an example now. Let’s presume, the price of the selected property is $100,000. To fit into the rule, the monthly net rental income should be not less than $2,000. To calculate it, we took 100,000 and multiplied it by 0.02 (2%). The algorithm suits all sums, working in both directions. So, if an investor wants to buy a property with a monthly rent of $1,500, its max price should be capped to $75,000 ($1,500/0.02).
A 2% rule in real estate resembles a 1% rule, which is also applied in the industry, working in the same way. Actually, the 1% rule is more frequently met – since it represents a more realistic financial outcome. Thus, the main idea of the guideline is to choose real estate, which can provide a lucrative cash flow, which will more likely be positive than negative.
The practicality of the rule
The rule, surely, is not some theoretical thing. It is really helpful in real life and allows avoiding financial losses and other unforeseen problems. However, it can’t be used alone because an investor can’t get all the data required to make a successful investment only with it.
Generally, if the investment is made according to this rule, the purchased property is mathematically able to generate enough income to cover all the expenses and create a financial cushion for vacancies, unexpected maintenance, and other unforeseen circumstances.
However, when buying a property, many other factors should be taken into account, including location, the rate of development of the neighborhood, vacancy rate, type of property, and other factors that we have already written about in other blogs.
It’s important to understand that a 2% rule in real estate is not used for all types of properties. For example, when it concerns the houses and apartments in big and well-developed cities. In such a case, the location is crucial for the purchase price generation and rent. The guideline is more applicable in smaller cities. For instance, in Memphis, it’s quite real to achieve such a ratio nearly in all deals but not so in LA.
In most cases, however, investors can only purchase a property in very poor condition (dilapidating real estate) following the two-percent rule. It’s also possible to find such a ratio when the property market is weak, not strong. It’s required to mention that taking the situation with coronavirus into account, the rule becomes even less balanced all over the world. An opposite situation is with the growing prices for certain types of property, which are more relevant for people today, as well as in the ascending real estate markets, like the one in Ukraine – the local profitability is not rarely even higher than 2%.
The described guideline can’t be considered strict and always applicable by investors. It is rather “nice to have”. Such a method is able to provide investors only with the general information concerning the probable cash flow, without any particular insight. The formula does not take into account any other factors, risks, peculiarities, and features of a property. You are always advised to thoroughly estimate many other important factors, such as location, condition of a property, correlation of net to gross rental income, cash on cash (CoC), ROI, cap rate, appreciation, regional taxation…
However, a 2% guideline can help investors see a general picture of the possible cash flow fast – if the fast decision is important in their particular situation and time.
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More about DGY
DGY is a real estate investment and property management company. Our experts have an impressive experience in turning businessmen into smart real estate investors. We collect limitless opportunities throughout the world’s best real estate markets and help our clients implement the best deals. We take care of all due diligence and customize documentation while your income grows. We also provide you with property management services so you can forget about the tiresome maintenance of several objects and entrust this process to professionals.
Investment advice and recommendations
DGY is an investment company that takes care of every client and helps them become successful investors. With the help of an investment experience and a well-thought plan, we will help you examine the market, choose a strategy specifically for you or your business, and calculate future costs to start making money with real estate investment.
In order to invest in real estate, you should consider how you will run your management in Ukraine. DGY will help you eliminate all possible pitfalls at an early stage as a personal project manager will be assigned to your case. They will assist you in choosing the project according to all required objectives.
DGY Investments takes care not only of purchasing property but also renovating an existing one. With the help of a thorough plan and estimating, we will thoroughly prepare a property for sale. Our professionals evaluate an investment property and create a strategy that includes the costs for renovation, possible taxes, fluctuations on the market, etc. Therefore, our clients are able to resell the renovated properties in Ukraine with more than 15-20% profit from the initial price.
Before our clients decide to deal with real estate investing, they consult with our experts concerning details such as the necessary documents needed to purchase a property and successfully run all the processes connected to it.
Therefore, if you are eager to invest in Ukraine, it’s essential to have all the paperwork done correctly, and that’s the moment when our team of experts takes care of this step. DGY Investments helps investors buy real estate property, manage the paperwork, start preparing relevant documents for purchasing realty in Ukraine, and close the deal successfully.
Real estate investment opportunities in Ukraine
When an investor decides to invest in real estate in Ukraine, the most affordable way to attain stable passive income is through buying residential real estate. Investors can expect to receive a regular monthly payment from their tenants at a fixed monthly amount, unaffected by inflation or other unforeseen circumstances. The amount of rental income will vary depending on the size, type of property and location. For example, buying an apartment in Ukraine’s capital Kyiv is beneficial to investors due to offering a large working population, central location and affordable prices. Hence, the minimum price of renting a decent one-bedroom apartment in Shevchenkivskyi District will be around $1000 per month in 2021, followed by Pecherskyi District with a cost of $850 per month. Besides, investing in real estate in Ukraine annually brings clever investors up to 15% of yield, attracting many business people every year.
Properties for investments in Ukraine
Ukraine has a giant sector for real estate investing. Businessmen who come there all over the world often choose between investing in residential and commercial properties. The main advantage of buying property in Ukraine is the affordability of prices on the houses and apartments. For instance, if you invest in real estate in a historical district, a luxurious apartment will cost you around $85k only.
How to invest in Ukrainian Real Estate
In order to invest in Ukrainian real estate, you should take into account a list of crucial factors. The first one is to choose what kind of realty you are going to invest in: residential or commercial. It is vital as it should comply with Ukrainian real estate law. The second tip is to identify the purpose of purchase in order to make a strategy for the property. For instance, you may purchase the property for your own use or buy it for lease. The next step is to calculate the taxes and what kinds of taxes are payable during the purchase, owning, or selling. Also, to invest in real estate properly, you should keep in mind currency control rules in Ukraine to sell a property and get a higher profit.