We have blogged about the 1% rule earlier with the post here. The 2% rule is an extension to the 1% rule, and the intention of the 2% rule is to allow real estate investor to quickly determine if the deal is a potentially good cash flow deal or not. As always, we will first look at the formula (which is the same formula as the 1% rule):

Monthly Income / Purchase Price * 100

Using the similar example as the previous blog post, a monthly income of $1,000 with a purchase price of $150,000 equals a result of 0.67%, which is far away from the 2% threshold. So trying to spin it positively again, if we tweak the formula to this:

Offer Price = Monthly Income / 2%

This will come out to an offer price of $50,000, based on the formula of $1000 / 2%. There is no guarantee if the seller will accept, but as a real estate investor we should always strive to take the emotion out of each deal, and go into each deal purely from a math standpoint.

The rationale behind the 2% rule is that, if a deal passes the 2% rule, there is a great chance that it will provide a good cash flow to the investor. As you can see, there is no concrete number that we are referencing here, but more a general perception, based on a 2% calculation to arrive to a quick assessment on whether this is a good cash flow deal or not.

Just like the 1% rule, the same financial constraint applies, in which the 2% rule is meant for a quick assessment and we cannot use it to replace the full due diligence, because the 2% rule does not consider any expenses in the formula, so we are (again) looking at only half the picture.

By combining the 1% rule and the 2% rule, we now have 2 quick and handy formulas, even without a calculator, we can assess whether a real estate investment is a deal or not (Yes / No decision), and whether it is a good cash flow deal (>= 2% or not).