Income Rule Calculation

We know that our rent should equal some unknown percent of our total market value (we have been saying 2%/month or 24% per year, but in this example it’s unknown because this is what we are calculating for.

Rent = Market Value * X

Rent = MV*X

We Also know that we want to earn 35% cash return

Profit = .35 * Cash

Profit is calculated as such:

Profit = Rent – Expenses – Mortgage

Plugging in:

.35*Cash = MV*X – Exp – Mort

We also know that expenses are related to rents based upon the 50% rule:

Expenses = .5 * Rent

Expenses = .5*MV*X

Plugging in again:

.35*Cash = MV*X – .5*MV*X – Mort

.35*Cash = .5*MV*X – Mort

Solve for X

.5*MV*X = .35*Cash + Mort

X = .35*CASH/.5MV + MORT/.5MV

We know that we have to put 20% down so

Cash/MV = .2

And we calculated earlier

Mort/MV = .04584

So plugging in:

X = .35*Cash/.5MV + Mort/.5MV

X = .7(Cash/MV) + 2(Mort/MV)

X = .7*.2 + 2*(.04584)

X = .14 + .092

X = .232

Finishing Up:

Yearly Rent = Market Value * X

Monthly Rent = Market Value * X/12

Monthly Rent = Market Value * .232/12

Monthly Rent = Market Value * .0193

Round to .02

2% rule is based upon 50% expenses with a 4% interest rate with a desired 35% cash on cash return. The 2% rule also works at 6% interest rate with a desired 30% cash on cash return.

MANIPULATE THE NUMBERS TO CREATE YOUR OWN RULES

Why did I go through all this math? Well, now you can create your own “2% rule” and call it whatever you like. This is your own personalized screening criteria to help you find the best deals.

X = .35*Cash/.5MV + Mort/.5MV