BiggerPockets

I posted this in another category but thought I might get more input here. I'm trying to understand the 50% rule.

I've read numerous posts concerning the 50% rule. There are many ideas and opinions on how to figure it. Out of what I've read, this is how I understand it; correct me if I'm wrong.

You figure 50% of the gross scheduled rent. Let's assume your monthly rent is $1500/Month.

50% of $1500 = $750/Month

Your total expenses should not exceed 50% of gross rent ($750 in this case per month).

Your expenses (not to include your mortgage payments) include:
Maintenance
Property Tax
Insurance
Operating Expenses
Vacancy
Advertising
Tenant screening
Tenant Damage
Legal Fees
CPA Costs
Business Entity costs
Am I forgetting any?

If 50% of the gross rent covers your expenses and the other 50% is more than your monthly Mortgage (principal and interest), it's a good deal that will cash flow.

Like I said, I've read many arguments on the interpretation of this rule so I'd like to hear your thoughts. I know this is not an exact science but is a good starting point in analyzing a potential deal.

I'd be interested in reading some responses to see if I understand it correctly. What other expenses am I missing?

Msokolski,

I think you've got a good grasp on the concept and the math. Everything Wheatie said is true. The key point is that the 50% rule is what you should expect expenses to be over time and a number of rental units. In other words, the 50% rule is what you should expect your BUSINESS to incur over time, which is what's important. What your expenses are this month or next month is totally irrelevant to the long term success of your business, unless of course you can't cover your bills this month. Finally, the 50% rule assumes that you are managing the property correctly. If you don't know how to properly manage the property, all bets are off!

Good Luck,

Mike