The 2 Percent Rule
If you've spent any time looking at rental properties, you've probably come across the 2% rule. It's one of the most commonly referenced rules of thumb in real estate investing, and for good reason: the math is simple and it gives you a quick way to filter deals.
The Math
Take a property's monthly rent, divide by the purchase price. If the result is 2% or higher, the property should cash flow positively even without appreciation, even with a mortgage, even with vacancies and repairs eating into your margins. A $100,000 property needs to rent for $2,000 per month. A $150,000 property needs $3,000.
At a 2% rent-to-price ratio, the gross annual rent equals 24% of the purchase price. After accounting for a mortgage payment, property taxes, insurance, management, maintenance, and vacancy, you should still have positive cash flow. The numbers work because the rent is high relative to the capital deployed.
Where the rule falls apart is the assumption that properties hitting this ratio are otherwise normal investments. Most investors treat the ratio as a verdict rather than a starting point. A property can hit 2% and still be a terrible investment if it's in a declining neighborhood with high vacancy and deferred maintenance on every house on the block. The ratio tells you a deal is worth a closer look. It doesn't tell you whether to buy.
When It Worked
Between roughly 2014 and 2018, the 2% rule was achievable in a handful of Midwest and Southern markets. Milwaukee, Cleveland, Memphis, Birmingham, Indianapolis, Kansas City. These were cities where the median home price sat between $50,000 and $80,000 and rents held steady at $900 to $1,200. The math worked because home prices hadn't yet caught up to the post-2008 recovery, but rental demand was strong and growing.
Investors who bought during this window did well. They locked in cheap properties with strong cash flow. Some of those properties have since doubled in value, which is a nice bonus on top of years of rental income. But the window closed.
What Killed It
Post-2020 price appreciation destroyed the rent-to-price ratio in almost every market. That $60,000 house in Milwaukee is now $120,000. The rent went from $1,100 to maybe $1,400. Run the math: $1,400 / $120,000 = 1.17%. That's not a 2% deal anymore. It's barely a 1% deal.
This happened everywhere. Inflation pushed home prices up faster than rents could follow. Low interest rates from 2020 to 2022 poured fuel on the fire, bringing in a wave of buyers (including institutional investors) who bid up prices in exactly the markets where the 2% rule used to work. When rates climbed back up in 2023, prices didn't fall enough to restore the ratio. The 2% rule became a relic of a market that no longer exists.
Today, the only properties consistently hitting 2% are in D-class neighborhoods: high crime, deferred maintenance, unreliable tenants, and code enforcement issues that turn cash flow into a legal liability. That's not a 2% deal. That's a trap.
The 1% Rule and the Modern Reality
Most serious investors today screen using the 1% rule: monthly rent should equal at least 1% of the purchase price. A $200,000 property should rent for $2,000. This is a lower bar, but it accounts for the reality that appreciation has compressed rent-to-price ratios in virtually every market.
Even 1% is hard to hit in expensive metros. In the Boston area, it takes a triplex just to get there. A single-family home priced at $600,000 would need to rent for $6,000 per month. That doesn't exist. But a triplex generating $2,000 per unit on a $600,000 purchase price hits $6,000 combined. That's how investors in high-cost markets make the math work: they stack units.
Other investors have moved past simple ratios entirely. They use BRRRR strategies to manufacture equity and improve the rent-to-cost ratio through renovation. If you buy a property for $150,000, put $50,000 into renovations, and it appraises at $250,000 with a rent of $2,200, your all-in cost basis is $200,000 but your refinanced mortgage is based on the new value. The ratio improves because you forced the appreciation rather than waiting for the market.
What the Ratio Misses
The biggest problem with any rent-to-price ratio is what it leaves out. A property hitting 2% in a declining D-class neighborhood is a fundamentally different investment than a property hitting 1.2% in a B-class neighborhood with rising home values and improving demographics.
The ratio doesn't account for:
- Neighborhood trajectory. A 1% deal in a gentrifying area might outperform a 2% deal in a stagnant one within five years, because appreciation compounds while rent-to-price ratios are static snapshots.
- Capex risk. Cheap properties that hit 2% often need $15,000 roofs, $8,000 HVAC systems, or $5,000 sewer line repairs. One major expense can wipe out two years of cash flow.
- Vacancy and turnover. D-class tenants turn over more frequently. Every turnover costs a month of lost rent, cleaning, minor repairs, and re-listing time. High turnover neighborhoods destroy the cash flow that the 2% ratio promised.
- Appreciation potential. The 2% rule explicitly ignores appreciation. But for most investors, appreciation is where the real wealth is built. A property that cash flows modestly but appreciates 5% per year will outperform a high-cash-flow property in a flat market over any reasonable time horizon.
Turnkey operators love the 2% rule because it makes their inventory look attractive on a spreadsheet. They'll sell you a "2% property" in a neighborhood they'd never invest in themselves. The ratio becomes a marketing tool rather than an analytical one.
Rules of Thumb Are Starting Points
The 2% rule had its moment. It worked in a specific market environment that no longer exists. The 1% rule is more realistic today, but it's still just a screening filter. It tells you a deal is worth running the full numbers on. It doesn't tell you whether the neighborhood is improving or declining, whether the building needs $30,000 in deferred maintenance, or whether the local economy supports long-term tenant demand.
The 2% rule (and its 1% cousin) are entry-level filters. For subscribers, I've built a deeper comparison tool in the analytics panel that lets you run rent-to-price ratios across entire markets, broken down by neighborhood class and historical trend. Instead of eyeballing individual deals, you can see which markets still offer favorable ratios and which ones have compressed beyond recovery. You can also overlay market cycle data to see whether a market's ratio is compressing because of organic growth (bullish) or speculative run-up (bearish). The difference between those two scenarios is the difference between a solid investment and catching a falling knife.