50% Rule & Taxes and Insurance
The 50% rule (or guideline) says you should not exceed 50% of your gross income in debt service.I.e. Principle and interest payment every month. Example, your gross rental income for the month is $1,000.00.Therefore your total loan payment should be $500 or less.Thus, leaving the other $500 for potential operating expenses.The leftover is your profit to do as you see fit.
I've often seen that insurance and property tax are considered "operating expenses" in the 50% rule.And not part of the debt service side.Insurance and property tax are two items are items that you obliviously going to need to pay.
In my last property purchase, the loan payment is clocking in at 43%, taxes are taking 12.7% and Insurance at 5.15% of my gross rental income.So while I'm under the 50% rule for just debt, I'm at 61% in required monthly payouts in principle, interest, insurance and taxes or PIIT.( I pay the taxes myself not the lender.)
My question is, what's other investors opinion?Do you consider insurance and property tax "operating expenses" or do you lump them in on the 50% side of the principle and interest mortgage or loan payments.Thanks!