Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
I didn't want to post this earlier, as Jon Holdman was planning to present on this subject at the BP Summit 2012 and I didn't want to detract from his presentation. But, unfortunately, Jon had a family emergency and wasn't able to attend the Summit, so I thought I would put this up here.
This is a video I made a while back -- it wasn't intended a formal tutorial, in fact I was just testing out some educational video creation software and through this together to see how the software worked. It's far from professional, and not at all rehearsed, so keep your expectations low... :)
That said, with all the discussions of The 50% Rule around here whenever a new investor join us, I thought it might be worthwhile to have a video tutorial on the subject. If anyone finds this useful, perhaps I'll do something a bit more professional.
Btw, to the mods, sorry for posting a link to another domain...I didn't know how best to embed the video. I made sure there are zero links on the page, so hopefully it isn't an issue. If you'd like me to embed this differently, let me know.
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
14y
J Scott brings Khan Academy to BiggerPockets. Very good job, especially with the example. Here is my quicker and dirtier version from a couple years ago: http://www.youtube.com/watch?v=UxhWvR76iak
Rental Property Investor · Taylor Mill, KY · Member since 2011 · 105 posts · 24 votes
14y
Very nice!! As stated, the examples on the white board really help drive home the point.
You mentioned perhaps re-doing it a little more professional. I think it is fine as is. Spend the time on the next topic! Maybe do one on the 2% rule and how it can be used, in addition to the 50% rule, to help analyze a deal.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
14y
Nice video J!
We should have more standard Camtasia feeds on the forum. I really think it would help trade ideas a lot better for the tech savvy.
Comments:
1. Under debt service in the 5:28 or so mark in the video "principle" should be "principal"
2. Perhaps V2 of the video or an advanced one could include a discussion of amortization, tax shields, and appreciation
3. A discussion of different loan types may be interesting as well. Something describing how IO product could increase cash flow while trading off amortization would probably be helpful for many
4. Some discussion of how lower class properties can generate expenses in excess of the 50% rule of thumb would probably keep people from making the mistake of using this technique as a catch-all even though you qualified this at the beginning of the video
5. A more advanced video could probably introduce time value of money concepts and timing for capital expenses instead of lumping them into the 50% category and spreading the costs evenly
Overall this is a great video! It should eliminate a lot of discussion about questions related to it that come up every week.
SFR Investor · Dallas, TX · Member since 2009 · 71 posts · 12 votes
14y
Thanks for the video J. I am just starting out and learning as much as I can and hopefully one of these days get my feet wet. The video was very clear and explained the concept in a simple manner for a newbie like myself. Hope to see the 2% when you get a chance.
Portland, OR · Member since 2012 · 66 posts · 30 votes
14y
Another great video would be one where you analyze deals. Maybe do like 10 different properties, a couple for SFR/duplex/fourplex/a 12-unit etc. And include everything in each analysis. Maybe provide some examples for us newbies to do while we pause the video then at the end you tell us the correct answers to make sure we go it down. Awesome!
Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
14y
Nice video J Scott thanks for posting. The pie chart was a nice touch.
P.S. O and man Camtasia gives me bad memories. I used to waste countless hours to create math tutorial videos with that cumbersome program till I switched to SmartBoard software.
Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes
13y
Well in this beach cities in LA maybe total costs/expenses can get close to 50% of rental income (especially if you include capital improvement expenses), its hard to find something in this area where the 50% of rental income covers the mortgage (interest/principal).
Thanks for your help on the video I liked it and it was very clear.
I guess it's more that the 2% rule is hard to come by here, not as much the 50% rule.
@Jon Klaus:...Do you have a short youtube on the 2% rule also? I would love to see that! :)
Here's a quick tutorial on the 2% rule:
If you're monthly rent is at least 2% of your total investment (basis) in the property, you're probably making a great return!
As an example, if you purchase a property for $40,000 and put $20,000 in to the rehab, your total investment is $60,000. 2% of $60,000 is $1200. If you're earning at least $1200 in gross rents, you're likely doing great.
This doesn't mean that you have to earn 2% or that earning less than 2% isn't a great deal (it may be!), but if you're earning 2%, it's almost certainly a great investment from a pure ROI standpoint.
Investor · Albany, GA · Member since 2014 · 70 posts · 8 votes
12y
@J Scott Thanks for that rundown. I thought that's what it meant. I've heard of the 1% rule so this is the same thing, but doubled to protect one's ratio? I guess the "% rule" can go up or down depending on different market conditions over time?
(is this what you meant @Jon Klaus ...when you mentioned values have changed since 2010?)
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
12y
The math doesn't change, but what the market allows or offers changes. Run all the numbers on any property you are considering to see if it meets criteria acceptable to you. If you aren't sure how to do the financial analysis, post your deal here, and get feedback.
A 1% deal could be OK, but it could be bad, too. Factor everything in to find out.
Saint Albans, WV · Member since 2013 · 24 posts · 2 votes
12y
Hi
@J Scott ,
@Jon Klaus,
Regarding the 50% rule and 2% rule, do they assume that utilities are payed by the tenant or by landlord? In my area we pay utilities ourselves so when my rent is $500 in addition I pay water, gas and electric bill is another $300. So when we use 50% rule do we assume that tenant will pay all the bills or it is included in this 50% as expenses? Same for 2%, if property cost 30000 then rent should be 600 + utilities by tenant??
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
12y
Typically, when utilities are included in the rent, you'd expect the rent to be higher. In reality though, expenses tend to average higher than 50% when utilities are included. Master metered properties are often older and command lower rents. This also makes the expense percentage higher. I've heard of investors using 60% expenses as a rule if thumb on "bills paid" properties.