50-2 Rule for Real Estate Investing
In the US, and all over the world, real estate investors are seeing green in a time when there is plenty of red. These investors are looking to buy properties that will not only appreciate, but also provide positive cash flow at the time of purchase. To do so, they’ll have to follow the popular 50-2 rule.
The 50-2 Rule
The 50-2 rule is very basic. First, the 50% part of the rule says that 50% of your rental revenue from the property will be eaten up by maintenance, repairs, property management (property management is 10% of gross rent) and vacancies. The 2% rule requires that the property generate 2% of the cost of the property per month in rental income. For example, a $100,000 investment should provide $2,000 a month in gross rents.
Aren’t These Numbers Extreme?
Novice real estate investors may look at the 50-2 rule and come to the conclusion that the numbers are simply unachievable. Earning 2% per month gross is exceptional, that much is sure, but it is absolutely necessary to buy units that are cash flow positive.
There is very little argument over the fact that 50% of your rental revenue will be used on maintanence and repairs, as well as property management. So, knowing that you’ll only see about 1% per month, you’ve also got to consider that financing the rental units may cost as much as 6-7% per year. You’re already operating at very thin margins!
50 2 Rule Works Best with Multi-Unit Investments
Single family homes aren’t going to provide nearly the same return on investment as a duplex or fourplex would. You have to assume that there are far more potential tenants for a 1bd $350 a month unit than there are for a 3bd $600 unit. The 1bd unit are far less expensive than a 3bd, all the while providing better cash flow per month per dollar invested.
A single family home, for instance, may cost $100,000. A duplex of the same size would cost just as much, but it’d allow an investor to achieve greater monthly rents (increased demand for smaller units) and diversify the risk among twice as many tenants. The single family home may generate $1500 a month where two duplexes bring $850 a month each.
Why Cash Flow Matters Most
For a real estate investor, there is nothing more important than positive cash flow. A rental unit that pays for itself (maintenance and debt service) means you’ll be able to leverage up faster. 10 units that provide $1500 a month in positive cash flow can be leveraged into even more positive cash flow units. In time, you’ll not only build a solid stream of monthly income, but also own several pieces of real estate that someone else paid for. What is better than that?
