What Is the 2% Rule for Investment Property? Clear Math, Examples, and When It Works

• by Corbin Fairweather
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You’ve heard the 2% rule tossed around like a cheat code for rental property. Here’s the truth: it’s a blunt screening tool, not a profit guarantee. It can save you time, but it can also make you walk past great deals in tight markets, or chase risky ones in cheap markets. If you want a simple way to test a property in minutes-and know when to trust the result-this guide gives you the math, the caveats, and real examples.

TL;DR: The 2% Rule, in Plain English

The 2% rule says a rental is promising if the monthly rent is at least 2% of the purchase price (including basic make-ready costs). Example: buy at $200,000, you want $4,000/month rent. That’s it. It’s a speed filter, not a valuation model.

• Quick formula: Monthly Rent ÷ Total Purchase Cost ≥ 0.02.
• Why it exists: At 2%, the gross yield (~24% per year) is usually high enough to pay typical expenses, mortgage, and still leave cash flow.
• Where it works: Lower-cost markets with above-average rents relative to prices (think smaller US metros or value-add multifamily after rehab).
• Where it breaks: Expensive cities (Auckland, Sydney, London), prime suburbs, or new builds with low yields; also when expenses/insurance are spiking.
• Better way: Use it as a first-pass screen. Then layer the 50% rule (expenses), cap rate, and a quick mortgage test. If it survives, run a real pro forma.

If you’re searching online and scanning dozens of listings, the 2% rule real estate filter can slash your shortlist fast. Just don’t stop there.

How to Use (and Not Abuse) the 2% Rule

Start simple. Then add a couple of fast checks to avoid false positives.

1. Calculate the 2% screen. Add up total in price + immediate make-ready (paint, carpet, basic repairs). Divide the expected monthly market rent by that number. If ≥ 0.02, it passes the 2% screen. If 1%-1.5%, it might still work in tight markets-don’t automatically bin it.
2. Run the 50% rule for expenses. As a quick proxy, assume 50% of gross rent goes to operating expenses (taxes, insurance, rates/body corp or HOA, maintenance, management, water/sewer if landlord-paid, vacancy, and capital reserves). That leaves 50% of rent as Net Operating Income (NOI) before mortgage. On a $2,000 rent, NOI ≈ $1,000/mo by this shortcut.
3. Do a 60-second mortgage check. Estimate principal and interest (P&I) at today’s rate for your loan type. Keep it fast-use a rough rule: each $100k borrowed at a mid-6% to 7% rate is roughly $650-$700 per month on a 30-year term (local terms vary). In New Zealand, 25-30-year P&I terms are common; use your bank’s mobile calc for accuracy.
4. Check DSCR. Debt Service Coverage Ratio = NOI ÷ Annual Debt Service. You want ≥ 1.2 for a cushion. Using the 50% rule NOI, annualize it (NOI×12) and divide by yearly P&I. If DSCR is 1.0 or less, you’re break-even or negative.
5. Refine with cap rate and cash-on-cash. Cap Rate = NOI ÷ Total Cost. Cash-on-Cash = Annual Pre-Tax Cash Flow ÷ Cash Invested. These tell you returns independent of leverage (cap) and the return on your actual cash (CoC).
6. Only then go deep. If it still looks good, pull real numbers: quotes for insurance, rates, PM fees, maintenance reserves, vacancy norms, and actual rent comps. In New Zealand, get recent rent data from MBIE or Tenancy Services bond lodgements; for US deals, check HUD Small Area FMRs or local MLS comps.

Why stack these checks? The 2% rule ignores expenses and financing. The 50% rule reins that in. DSCR and cap rate catch market-specific realities-like higher insurance on coastal properties or rates/body corp levies on apartments.

Examples and Reality Checks (NZ, US, and Value-Add)

Here’s how the math plays out across scenarios. I’ll keep currencies generic-use your local currency and bank rates when you run this at home.

1) Auckland house example (why 2% almost never fits)
Suppose a $900,000 freestanding house in a decent Auckland suburb. The 2% rule wants $18,000 per month in rent. Not happening. Even the 1% rule would imply $9,000/month, which is still unrealistic for a normal family rental. In large, high-demand cities, prices have far outpaced rents. Typical gross yields cited by REINZ and CoreLogic NZ for houses in Auckland are often in the low single digits. That doesn’t make Auckland a bad investment-it just means cash flow is tight and you lean more on long-term growth, development plays, or adding value (granny flats, minor dwellings, or converting underutilized space subject to council rules).

2) NZ apartments vs townhouses
Apartments can have higher headline yields than houses but watch body corp levies, maintenance, and insurance. A 1% deal might exist on paper, then vanish after levies and vacancy. The 50% rule is especially useful here as a sanity check.

3) US Midwest small multifamily (where 2% can still pop)
Take a $120,000 duplex renting for $1,250 per unit, $2,500 total per month. That’s just over 2%. Using the 50% rule, NOI ≈ $1,250/mo. If you borrowed $96,000 (80% LTV), P&I might be ~$650-$700/month depending on rate/term. DSCR ≈ 1,250 / 675 ≈ 1.85. That’s solid. Now check cap rate: NOI annualized ≈ $15,000; cap ≈ $15,000 ÷ $120,000 = 12.5%. Good on paper. You’d still verify taxes, insurance (rising in many US states), and realistic rents.

4) BRRRR/value-add path to 2%
Buy a rough fourplex at $220,000, put in $80,000 for rehab, all-in $300,000. If you can achieve $1,600 per unit, $6,400 total monthly rent, you’re at 2.13% on cost. This is where the rule shines-turning a tired asset into a strong rent-to-price ratio. The risk: rehab overruns, slower lease-up, and the refinance terms. Stress-test with 10-15% contingency and longer lease-up assumptions.

5) Short-term rentals
Monthly rent is lumpy. You need average net income after cleaning, dynamic pricing fees, platform fees, and higher capex. The 2% rule is too blunt here. Build a seasonality-adjusted P&L instead and check DSCR on your worst three months.

Note the implied gross yield is always 24% at 2%. Sounds amazing, but it bakes in nothing about costs or debt. In 2023-2025 with higher borrowing costs and rising insurance in many places, a 24% gross yield might be what you need just to end with healthy cash flow. In low-yield cities, the 2% rule is more a thought experiment than a target.

Cheat Sheets, Decision Rules, and Pitfalls

Here’s how to keep this fast and reliable.

The 2-minute deal screen

1. Estimate realistic monthly rent from 3-5 close comps (same beds/baths, similar condition, same school zone if relevant).
2. Add purchase price + immediate make-ready + closing costs (stamp duty/transfer costs, legal, inspection, loan fees).
3. Rent ÷ Total Cost ≥ 0.015? Keep evaluating. ≥ 0.02? Strong on paper. < 0.01? Probably pass unless special angle (development, STR, add-on dwelling).

The 5-minute math stack

1. 50% Rule: NOI ≈ 50% of rent (adjust if you have real quotes).
2. Mortgage rough-in: Each $100k borrowed ≈ $650-$700/mo at typical 30-year US rates; NZ lenders and terms vary-use a local calc.
3. DSCR: Aim ≥ 1.2. If NOI just equals P&I, you’re one rate hike or one repair away from negative.
4. Cap Rate: NOI ÷ Total Cost. Many investors want ≥ 6-8% in stronger markets; ≥ 8-12% in riskier or tertiary markets. Calibrate to your area.
5. Cash-on-Cash: Annual cash flow ÷ cash invested. Decide your minimum (often 8-12%+ for cash-flow-first buyers).

Decision tree (quick)

• If Rent/Price ≥ 2% and property is not in a high-risk area, proceed to full underwriting.
• If 1%-2%: Check 50% rule, DSCR, and cap rate. Could work in good locations with lower capex/levies.
• If 0.8%-1%: Needs a value-add plan, special financing, or development upside.
• If < 0.8%: Pass for cash-flow strategy. Might be a land-bank or development play only.

Common pitfalls

• Ignoring insurance and rates/body corp. These have climbed in many regions. Get quotes early. In NZ apartments, levies can crush yields.
• Underestimating capital expenses (CapEx). Roofs, lifts, cladding, and long-deferred maintenance don’t care about your spreadsheet. Budget reserves.
• Assuming 100% occupancy. Use a realistic vacancy factor (5-8% is common; adjust to your submarket).
• Using post-renovation rent without a leasing plan. If you can’t name 3 real comps at your target rent, you don’t have a target-you have a wish.
• Forgetting taxes and rate resets. In many US counties, taxes jump to the new purchase price. In NZ, council rates can rise after upgrades; check schedules.
• Chasing 2% in rough pockets. Cheaper areas can hit 2% but carry higher delinquency, turnover, and repair calls. Your time is a cost too.

Pro tips

• Test sensitivity: What if insurance is +20%? What if rent is −5%? If your deal breaks, renegotiate or pass.
• Get pre-underwriting from your property manager. They’ll sanity-check rent and flag repair-prone features.
• If interest rates fall, great. Underwrite at today’s rate + 1% to protect yourself.
• If you can add a legal minor dwelling or convert space (subject to council or zoning rules), you may turn a 0.9% deal into 1.3%+ without overpaying.

FAQ, Then Your Next Moves

Is the 2% rule the same as 2% of ARV?
No. It’s usually rent vs total cost (purchase + initial repairs), not rent vs after-repair value (ARV). Some BRRRR investors use ARV, but that’s a stricter bar.

How does the 2% rule compare to the 1% rule?
The 1% rule is looser-rent should be at least 1% of price. In many big markets, even 1% is rare for standard houses. Use 1% as a “maybe” filter, then rely on DSCR and cap rate to judge cash flow.

What about cap rate instead?
Cap rate uses NOI and ignores financing, so it’s more informative than a rent-to-price ratio. The 2% rule is just lightning-fast. Cap rate wins when you have real expense data.

Does 2% apply to multifamily?
Small multis and older C-class buildings are where 2% shows up most. On larger multifamily, you’ll underwrite cap rate, expense ratio, and DSCR rather than a simple 2% target.

Short-term rentals or student housing?
Skip the 2% rule. Build a month-by-month NOI model with occupancy, seasonality, cleaning, furnishing amortization, and platform fees. Then check DSCR and cash-on-cash.

How do rising insurance and maintenance affect the rule?
They weaken it. A 2% deal in 2018 could be a 1.6% deal in 2025 after expense inflation. Update your expense assumptions. In coastal or weather-exposed regions, get firm quotes.

Should I ever buy a sub-1% deal?
Yes-if you have a clear value-add or development angle, strong growth thesis, or tax strategy. Many investors in cities like Auckland focus on adding dwellings, reconfigurations, or long-term land value rather than pure cash flow.

Which sources are credible for market data?
In New Zealand, check Reserve Bank of New Zealand for rate context, REINZ and CoreLogic NZ for prices and yields, and MBIE/Tenancy Services for rents. In the US, look at HUD, FHFA, and local assessor/tax sites.

Do banks care about the 2% rule?
No. Lenders care about income, expenses, valuation, and serviceability (DSCR or DTI). The 2% rule is an investor shortcut, not a banking metric.

Can I use the 2% rule for house hacking?
Sure, as an initial scan. But house hacking has different goals-covering your living costs, lifestyle fit, and future exit. Run a real budget, not just a ratio.

What about new builds?
New builds rarely hit 2% because of higher prices and warranties. You trade yield for lower maintenance, better tenant appeal, and (sometimes) better lending terms.

Your next steps (pick your lane)

If you invest in high-price markets (e.g., Auckland):

• Don’t anchor to 2%. Use 1% as a stretch goal and underwrite DSCR carefully.
• Hunt for add-value: minor dwellings, legal sleepouts, subdividable land, or under-rented properties you can reposition.
• Compare houses vs apartments after levies and maintenance-don’t trust headline yields.
• Stress test at today’s rate +1% and include realistic insurance and rates.

If you’re chasing cash flow in lower-cost markets:

• Use the 2% rule to thin the herd, then verify with the 50% rule, DSCR ≥ 1.2, and cap rate.
• Require inspection and CapEx plans; cheap doesn’t mean low risk.
• Check property manager feedback on rent realism and tenant quality.

If you’re a BRRRR/value-add investor:

• Calculate the 2% on all-in cost, not just purchase price. Add a 10-15% contingency.
• Build a lease-up plan with 3 verified comps at target rents.
• Refi math: Ensure DSCR works at conservative rates and valuation.

Troubleshooting common snags

• The rent looks 2%, but DSCR is weak. Expenses are heavier than you assumed-get quotes, renegotiate price, or reduce leverage.
• Deal is 1.2% but in a prime location. It could still work if expenses are light, maintenance is low, and you can add income (pet rent, storage, parking, solar).
• Insurance quote blew up the deal. Shop multiple carriers, adjust deductibles, consider mitigation (roof, wiring, alarm), or pivot submarket.
• Rates/body corp levies crush yield. Get minutes, long-term maintenance plans, and upcoming projects. If levies are rising, model them in.
• Appraisal came in low. Re-assess all-in cost and cap rate. If returns die at the new basis, be willing to walk.

The 2% rule is a strong flashlight, not the sun. Use it to spot likely winners fast, then do the real work so your numbers survive contact with the real world.