2% rule vs 50% rule

I found a property that passes the 50% rule and cash flows at \$100+ per unit. My question is as follows: Can a property pass the 50% rule, but fail to pass the 2% rule?

Property Details:

Ohio duplex (3bd 1bath). I viewed it and it is move-in ready. Market rental rates are \$625. The gross rents multiplied by 50 equal \$63,000. The asking price is \$67,500. Therefore it fails the 2% rule. According to my math, I used the 50% rule and it passed at \$105.50 cash flow per unit.

Gross rents: \$1,250
#1: \$625
#2: \$625
Principal & Interest: \$414 @7.25%

Expenses:
50% Gross Rent (\$625)+ 7.25% Debt Service(\$414)= \$1,039

Cash Flow:
Gross Rent (\$1,250) – Expenses (\$1,039)= \$211

Cash Flow per Unit:
\$105.50

If it passes the 50% rule by cash flowing, is the 2% rule as important? Mind you, it passes the 50% at the asking price. I would negotiate down even farther. Any comments or critiques?

Leo,

There is nothing to pass with the “50% rule”. The 50% rule is nothing more than a rule of thumb that says that the operating expenses are about 50% of the gross rents.

If you’re getting \$100 per unit per month in positive cash flow using 50% of the gross rents as operating expenses, you’ve got a good deal in my opinion.

Good Luck,

Mike

From LEO to REI,

You will probably discover that there are economies of scale to be gained with a multiunit property. I would think that property taxes may be lower for your duplex than they might be for two single family detached dwellings of comparable size. Another example might be yard service and landscaping. How about mileage to visit your property – one trip and you visit two properties.

The 50% rule is a rule of thumb, not an absolute. When you do a detailed cash flow analysis with better estimates for your expenses, you may find that your operating costs are really 44% of gross rents.

Also keep in mind that the asking price is not what you might really pay for the property. The asking price is just the starting point for negotiations. If the asking price is \$67500 and MLS listed properties typically sell for 92% of list, then the seller might accept an offer of \$62500. Open negotiations by offering \$60000 and come up to \$62500 gradually if the seller counteroffers.

Thank you for the input. I guess I was a little aprehensive about my math. I thought I would be required to buy completely distressed properties or find sellers that were in a world of hurt in order to get properties to flow at \$100/unit. When I found this and my math had it flowing even at the asking price, I thought I may have made a mistake somewhere. That means as the purchase price goes down through negotiation, that’s all gravy.