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What Are the 1 Percent and 2 Percent Rules in Real Estate Investing?

Are you looking for a way to diversify your investments? If so, you may be looking at real estate. Similar to other types of investing, some risks come with investing in real estate. Fortunately, there are ways to mitigate this risk as long as you follow a few helpful rules. This includes the 1 percent rule and the 2 percent rule. Even though these rules are similar, they are not the same thing. These rules can help you protect yourself when you invest in local real estate. If you have questions about real estate investing, you should reach out to a professional real estate consultant.


The 1 Percent Rule

The 1 percent rule dictates that the mortgage payment on a property should be no more than 1 percent of the value of that property. For example, if someone purchases property worth $300,000, the monthly mortgage payment should not be more outstanding than $3,000 per month. If the mortgage payment is higher than this number, it will be tough to maintain positive cash flow on the investment property. Rent payments must cover not only the mortgage but also home insurance, utility expenses, and maintenance expenses. Furthermore, this money needs to cover potential repairs. The older the house is, the more likely significant repairs might be needed.


Remember that local rental markets will be responsible for dictating rental value. Therefore, this rule should be used as a guideline; however, it won’t dictate potential rental income. Before making a decision, real estate investors should assess the opportunity for rental income.


The 2 Percent Rule

The 2 percent rule is similar to the 1 percent rule; however, this rule states that a property is a good investment if the potential rental income every month is equal to or greater than 2 percent of the house’s purchase price. For example, if someone buys a property for $250,000, the property is a good investment if the rental income exceeds 2 percent of the purchase price of this house, which would be $5,000.


In the current environment, this rule is rarely used because it is very difficult to get someone to pay 2 percent of the house’s purchase price in rental income. There are still some situations where this rule might be used. For example, some people purchase homes in distressed neighborhoods or areas that are gentrifying quickly. In Indianapolis, it might be possible to get 2 percent rent; however, it is still challenging. 


Consider Working with a Professional Real Estate Consultant

There are plenty of opportunities in the local area for aspiring real estate investors. Even though purchasing property can be exciting, it’s critical to take your time and not rush into purchases. Evaluate the benefits and drawbacks of every option carefully before making a decision. Real estate purchases are major financial moves, and people need to make sure they’re on solid ground before they move forward. This is why everyone should consider working with a professional real estate consultant who has intimate knowledge of the local area that they can use to help people make the right decisions.