BiggerPockets

It has been agressively stated here on BP that operating expenses average 50% of gross rents. I have posted many times that while that may be true with some properties, it is not accurate or appropriate to use this percentage on all properties (speaking of residential 1-4 units only).

I have stated that when you have gross rents of $400-$700 monthly, it will most likely average out to be in the ballpark of 50%, but as rents increase to amounts above $1000 per month, the ratio or percentage decreases due to a variety of factors (which will not be explained here).

The purpose of this post is to get some viable data from many individuals who have rental units with monthly rental rates in excess of $1,000 (per door) and have at least 3 years of financials. So, if you have property which fits this criteria, Please respond here with the following: (Take all the years you have owned the property(ies) and combine all the amounts listed below, then divide by the number of years to get an accurate annual average):

Gross rents
Actual annual operating expense figures (fixed expenses - taxes, insurance, PM, utilities, etc.)
operating expense reserves (items which do not occur regularly such as repairs, maintenance, vacancy, damage, advertising, legal, etc.) Please include what you have personally experienced with your properties only!
Then list your capital expense reserves (although this is not actually an operating expense, accounting wise, for avoidance of arguments sake, let's include it)
Finally, we can now arrive at your NOI, so post that as well.

Note: If you have multiple properties, combine all the figures as one and note how many properties (actual doors) the figures represent. Once we have had at least 100 doors represented by many posters, I will compile the numbers and see what operating expense ratio was averaged. If we get a rapid number of posts which quickly total more than 100 doors, we can move the figure up to 200 or more before I compile the numbers. The more data entered, the more accurate the average should be. Let's have some fun with this! :lol:

I will post updates here on the figures as we get enough to compile.

Do you really think you are going to get many investors who are getting 1000 bucks per unit? I would think that most of us fall between the $400 to $800 per unit range.

I think Taz said it best that the 50% "rule" is a great "rule of thumb." We certainly have members who push this rule because if you were to follow it, you'd practically be guaranteed a strong cash-flowing property.

It is not the motto of BiggerPockets, and is not the only "rule" that members here promote to one another.

I'm one who says it is better to be conservative then to be sorry, and if the 50% rule helps teach newbies to be cautious, then I think it is the greatest thing ever conceptualized. Too many people are out there screaming how little money you need to make money in real estate and how easy it is to find turn-key or cash-flow properties. This rule focuses on the expenses, which most newbies simply ignore for the most part. That makes the rule a beautiful thing in my book.

Thanks to all who contributed to the cause of the thread which was 0.
It appears that there are certain individuals who are not interested in the posted experiment. Fine. I won't waste any more of my time as it appears that many seem to be threatened by the possibility of being wrong.

The thread was not created with intent to discuss, prove, or disprove a 50% oe rule, only to gather some info from many investors here on BP. It is obvious that some of you will not allow that. Too bad.

I will be the first to say I love the 50% rule as a newbie. I would look at many properties and thought I would cash flow easy, mortgage was at 750 I could rent for 900. Then I learned... and boy is that a good thing I now understand things WILL go wrong and its much better to use the tenants money for those problems than mine. Like Josh said I would rather be safe and conservative than sorry.

Does it make it harder to find properties, yes it does. Does it make it easier to have a smooth running business, yes it does. Ill take the small problems of finding properties and having a cash flowing business over finding tons of properties THAT I AM PAYING to keep.

In my experience collage rentals are one subset where higher rents do not necessarily mean a lower percentage of expenses -- especially when I factor in my time as manager/parent/nanny/counselor/evil landlord.....

I own a number of single family homes (over 20) in the greater Phoenix market. I also have over 25 years experience analyzing income and expense statements for commercial and multi-family properties. Although I'm not willing to disclose specific numbers, I think my experience qualifies me to comment on this controversy.

Most of my rents are over $1,000. Taxes have averaged about one percent of value over 12 years, although with the downturn in the market and despite the Maricopa County Assessor's proactive effort to reduce assessed values, they were a significantly higher percentage of value for 2008. All of my properties are single family residences, and they range in age from 5 to 45 years. The vast majority are three and four bedrooms, with a couple of 2 bedrooms.

I can tell you that over this sample and over 12 years, the expenses, including the vacancy and collection loss and the capital improvements, have run around 50 percent of scheduled gross. However, most of the properties are managed, so about 7 percent goes to management. If I had managed everything myself, the expenses over the 12 years would have been a lower percentage of the SGI.

In addition, expenses have risen faster than rents (MikeOH is the only person I can recall who has pointed out this dirty little secret of real estate investing) so I expect to be over 50 percent for the next few years until rents start to rise again. Twelve years ago, in the halcyon, pre-California invasion days, the expenses were somewhat lower as a percentage of SGI.

In my experience, the biggest factor that should be considered in the expense analysis of a single family home is the rent differences among various parts of the country. A furnace costs the same pretty much anywhere. So do roofs and water heaters. Taxes can also vary widely as has been pointed out. There will be variations in the overall expense percentage to apply and an investor should carefully analyze the numbers before buying anything.. The 50 percent rule is an excellent starting point and should be used by a new investor to temper his or her enthusiasm and to question any sales pitch or pro forma operating expense analysis provided by the seller.

With regard to Rich Weese's comments, in the Phoenix market there is a big trade-off for buying new/newer homes over older, well-located homes. Newer homes are found on the outskirts of the area. As lots of inexperienced investors have found out, rents are lower, vacancy is much higher, HOA's are mandatory and expensive, and tax rates are higher because there is no infrastructure. Those folks have lost over 60 percent of the value of their properties in many cases. Even at current prices, I'm not convinced these properties would cash flow at current rents, given current vacancy and operating expenses. When looking at new and newer homes, an investor should analyze the trade-offs in their specific market.

I don't have an axe to grind or any reason to distort the numbers. It sounds like Nationwidepi specializes in marketing investments to folks with good jobs who want to diversify their investments away from the stock market. These folks do not want management intensive properties, and are willing to sacrifice current cash flow for long term appreciation. If he is buying and recommending new properties in strong rental areas, his current expenses may well be lower than 50 percent. Long term, however, the expenses will trend much higher. MikeOH, on the other hand, is running a rental business that must cash flow to support him and his family. His expenses will differ, but they will be very tightly controlled. If he experiences 50 percent expenses, then an investor that wants to follow his business model should listen up.

I won't ask either person to post their numbers because I'm not willing to do so. I will just wish them both (and everyone else) a merry Christmas and better investment performance in 2009.

These are the threads that help make this site rock. The contrarian views provide an education that is valuable, and cannot be found in any book. I wish I had some value to add on this specific thread, but not yet.

Either way:
Happy Holidays!

First, a description of what is included in the operating expense numbers for analysis and what is not.

Taz, if you're doing this for the purpose of comparing it to the 50% rule, it is important that you include the vacancy expense and the capital expenses. That will require a little extra effort, because vacancy usually isn't calculated as an "expense".

I'm looking forward to seeing the data!

Mike

Jon, Yes, the "50% rule" includes all the money you spend or don't collect. That's everything that's truly expenses -- management, maintenance, utilities if you pay them, taxes, insurance, legal costs, tenant damage, etc. It also includes capital items (e.g., new furnace) that aren't expenses for the IRS, but do come out of your pocket. It also includes vacancy.

Now, if you mean the rehab costs you would pay to make a new purchase rentable, then, no, I do not include those. I lump those costs in with the purchase price to determine my "all in" cost of the property. That's the same as the IRS. Costs incurred to get the property rent ready adjust your basis rather than being treated as expenses.