Why the 2% Rule IS Hurting Young Investors


The 2% Rule in the American property market states that:” all rents that exist above 2% of the buying price of that property present a real deal”. But since such a shorthand rules exhibit some dangers for most of the new investors, they still end up in losses. In this regard, there are these factors that new investors must look out for to avoid making massive losses in this venture.

Analyzing Two Properties

Francis Street

Its purchase price and the closing costs totaled to $15000, yet the investors still required a further $25000 for repairs. Fundamentally, $40,000 for non-mathematically-inclined projects seemed less feasible bearing in mind that the property was in a low-end neighborhood where rent cost $1,000 per month.

Chester Street

It had a purchase price and closure costs at $160,000. For Chester, $15,000 was also required for repairs, totaling to $175,000. Since most young professionals lived in the neighborhood, Chester had its rents fixated at $2000 per month.

From these stories, you can get assured of a friendlier cost of purchase that accords you double the cash flow when you decide to rent it out. But in the real sense, cash flow goes deeper and involves many detailed considerations than prioritizing on the cost of the premises and the subsequent rent.

Cash Flow and the Genuine Cost of Owning Property

Since cash flow is always rent minus the mortgage, there exist few costs incurred in the process namely: insurance, vacancy rate, maintenance, property taxes and repairs just to mention a few. Other expenses that apply at times include condominium fees which overall prove that such costs are always higher in cases of low-end properties that exist in rough neighborhoods. Looking at the two cases, you find Chester vacancy rate at 4% while Francis has 20%! Such differences, therefore, spark a lot of rage considering the two scenarios.

The Higher Costs of Low-end Properties

Evicting the tenants at Francis was inevitable as they stopped paying rent and that spelled an additional $9,000 in damages, and they also cost $5,000 in unpaid rents, court fees, and other legal fees.

The problem does not stop at the obvious higher risks for the defaulters because once the premises remain vacant, junkies broke into it and turned it into a drug den. They set it to all manner of immoralities with broken bottles, used condoms thrown everywhere. In this case, it had to be boarded up again with more sophisticated screws just to ensure it is not accessible to such people. Such is an evidence of financial costs of crime that in most cases does not cover personal safety risks.

Riches in the Niches

With Francis property costing a $40,000 in value but ended up costing $100,000 proves stressful when you consider the rise in costs over the decade. A look at Chester shows the inverse as it had purred smoothly with responsible tenants, and an overall lower turnover compared to Francis. In this case, there exist minimal prospects willing to commit and even sign a possible lease. One thing that is evidenced in such a case is the fact that when you buy and manage rental premises in such tough neighborhoods, is the prospects. These prospects only work with investors who understand whatever they are doing and can fully commit to them despite the various risks that lie therein. Whatever is certain is the need to understand how to mitigate these risks before committing to owning property in these areas.

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