Some real estate terms and rules can leave people confused; especially for those from non-real estate background wanting to rent property. So there is a 2% rule which not many must be aware of. The 2% rule is a simple guideline that helps people assess the potential profitability of a rental property before diving into detailed calculations.Understanding the 2% RuleIn simple words, the 2% rule says that a rental property is financially profitable if the monthly rent is at least 2% of the total purchase price of the property, which includes acquisition and basic repair costs too.To understand it better, here is an example.Say you have bought a property for INR 60 lakh. Now as per the 2% rule the monthly rent should be around INR 1,20,000 (2% of INR 60 lakh). If the expected rent is less, the property may struggle to deliver strong cash flow.However, you should also know that the 2% rule is not a guarantee of profit. In fact, it acts as a screening tool which helps investors shortlist properties worth deeper analysis.Why do investors use the 2% Rule?The main feature of the 2% is its very simple rule as compared to several variables like loan interest, maintenance and taxes, among others. The 2% rule allows investors to choose properties that are unlikely to perform well. The rule came in markets where property prices were relatively low compared to rents. How the 2% Rule works Understand it with an example:Purchase price (including repairs): INR 60 lakhExpected monthly rent: INR 1,20,000Since INR 1,20,000 is 2% of INR 60 lakh, the property meets the 2% rule. This means that the rental income may be sufficient to cover mortgage payments, maintenance and taxes, while still leaving room for profit. If the rent were only INR 60,000 (1%), the property might still work, but it would be over expensive.Is the 2% Rule practical in today’s timeWell the answer is no, not really. It’s only a rule on papers not in practical life. In many metro cities, meeting the 2% rule is not possible. It is because of high property rates and regulated rental growth. In rare cases, the yields are closer to 2–4% annually, not monthly. As a result, the 2% rule is more commonly achievable in smaller cities or emerging markets. However, this doesn’t mean that it’s an outdated rule. Limitations It does not account for interest rates or tenure of the loan Operating expenses do not countIt does not factor in capital appreciationIt may not reflect local rental laws or vacancy risksIn short, the 2% rule works as a first-level filter when comparing many properties.
