BiggerPockets

First of all- Some of us don't consider a $50 per door as an automatic failure. I look at other characteristics. If you want to read THREE hundred posts on this , go to post titled "Clash of the Titans- cash flow vs appreciation.". You'll have tons of input to respond to your question.
the other concerns about trees etc are more problematic. Once you buy a mistake, it is hard to rectify it. It sounds like you're going to face a difficult sale eventually, so you just need to decide when to bite the bullet, imo. Yes, we've all bought properties we might have passed on if we had a second chance. Don't let it get you down. Good luck. Rich in FL.

My properties aren't great deals based on the 50% rule. But, I'm into them for rougly half what they sold for at the peak, and less than they sold for 10 years ago before the bubble. I don't need immediate cash, so they're long term investments for me.

Shawn, as Jon pointed out I think that there is more to determining if a deal is "good" or not then simply saying if it doesn't get $100 per door it's "bad".
I think it really matters on your personal goals and circumstances. If you are looking for immediate cashflow so that you can start to live on it then obviously you need a decent cashflow such as $100.
In Jon's case and I believe Riche's case also, they are looking for long-term investments and do not need the cashflow today. Not saying negative cashflow is good but a small cashflow can be OK depending on your goals, so really think about what you want to accomplish in your RE investing.

Hi Shawn,

The 2% Rule is a screening tool to help quickly determine if a property is likely to cash flow. If a property passes the 2% Rule, then it is worth doing a little more analysis on. If rental property is not at least VERY close to a minimum of 2%, then it's a dud and I would move on.

The 50% Rule simply says that throughout the United States operating expenses (including vacancies and capital expenses which are not technically an operating expense) run 45% to 50% of the gross rents.

If you do a cash flow analysis with your operating expenses at 50 percent and your property is cashflowing $50 per unit per month, then while that isn't a great deal, it's also not a disaster. After all, you're making money as opposed to losing money and that's light years ahead of what most new investors do.

If your goal is to build a rental property business, then I would just keep these properties and make sure your future deals generate at least $100 per unit per month.

Rich is right, not everyone invests in rentals for cash flow. If you're buying rentals in an effort to speculate on future appreciation, that's a different business. Also, if you are already rich and are simply trying to generate a tax loss, that's a different business. However, if your goal is to actually run a business that makes money, then generating a significant cash flow is EXTREMELY IMPORTANT.

In your case, your first 4 units are cashflowing, but are a little lite. Keep building your business with better cash flow in the future and you'll be fine!

Mike

While selling problem homes always feels great you can't always do it when you want too. I have had to hang onto "mistakes" for years waiting for something - or discount them so much - or put a ton of cash into them etc...

We all buy mistakes and no matter how long you are in this business it can still happen - my point here is to know this is part of the business and it does happen to most every investor.

As to what you should do - really need more info - you say you have problems with tree's what kind of problem are you having and how does that impact you now or down the road a bit from a financial point of view?

Your cash flowing - and you're at $50 a door with the 50% rule that isn't half bad - it is actually half good :) So I assume you are realizing more $$ per month then the $50?

That 50% rule just says over time you will have to reinvest a portion of what your taking now as profit into the home - but making $50 a month per door with the 50% rule isn't a killer that is for sure.

All depends on why your investing - long/short terms goals - where the properties are etc....

Joe,

The 50% Rule has absolutely nothing to do with the loan.

The longer the term of the loan you get, the lower the payment will be and therefore the higher your cash flow.

The 2% Rule simply says that to get a significant cash flow from a rental, the gross monthly rents should be at least 2% of the acquisition cost (purchase price + rehab cost).

If you're buying higher rent properties, then you can sometimes buy at slightly less than 2% and get $100 per month in cash flow.

Mike

How can the terms of a loan NOT impact the 50% rule!!

I have asked this very same question here before and gotten the same answer that Mike oh provided (I love Mike Oh's contributions fyi):

"The 50% rule only states that the OE will be 50% of Gross Rents..........."

I think this is a fallacy in his argument over how to apply the 50% rule.

If one is to use the 50% rule to determine whether a property is a good purchase, then the terms of the loan MUST be factored in.

Lets assume for a moment that you can only get a 15 year loan on a property. And, you are an investor looking to get $100/door/month CF. Lets compare that to a 30 year loan and determine max purchase price with all else being equal:

Units: 2
Rents: $1200
Loan: 7%, 15 yrs (P+i=$400/month)
Max purchase price: $44,502.38

VS

Units: 2
Rents: $1200
Loan: 7%, 30 yrs (P+i=$400/month)
Max purchase price: $60,123.03

OR conversely

Purchase: $50,000
Rent: $1200
CF @ 15yr 6%: $89.04/m/door
CF @ 30yr 7%: $133.67/m/door

This is a huge difference!! If one finances for 15 years instead of 30 you magically spend less per month on maintenance, taxes, property management and other expenses?

So is it a good deal if you want $100 per door? The answer, I believe, is you have to look at the deal in terms of what is available in YOUR own personal situation.

If you can get a loan for 30 years at 5.0% interest rate, I would look at the property from that perspective. If you can only get 15 years with 7.0% you evaluate it from that perspective.

Whenever the 50% rule is discussed I often read the phrase "REAL WORLD EXPENSES." So I think using your available financing terms is the proper application of the 50% rule. I think MikeOh has the theory almost all right, but on this detail I think he is wrong.

Kirk, the 50% rule simply states that Net Operating Expenses will average 1/2 of the monthly rent. NOE does not include debt service.

To figure monthly cash flow, start with the rent, subtract NOE (50% of rent), then subtract your debt service (P&I).

Hope this helps, Dave.

Dave-

I highly doubt that you read my post. If you read my post and came to the conclusion that I do not understand how to calculate the 50% rule then either I'm a terrible communicator or you have trouble with reading comprehension.

I am specifically referring to the APPLICATION of the rule as it applies to making a PURCHASING decision. The fact of the matter is when you APPLY the rule you have a set of variables that include the following:

VARIABLES:
(1)Financing (rate, length of loan)
(2)Purchase Price
(3)Desired cash flow per month
(4)Total Rents
(5)Number of units

NOT A VARIABLE:
expenses (50% of gross rent)

When you APPLY the 50% rule to evaluate a property you must input any 4 variables listed above to determine the 5th variable.

Why would you plug in Cash Flow/Rents/Units/Pruchase Price as variables, but not the Financing????

In every single post where Jon or Mike have APPLIED the 50% rule I see something like this:

"The way I see this deal

Pruchase Price: $50,000
Rents: $1200
OE:$600
NOI:$600
DEBT SERVICE (7% 30 yrs) $332.65

CF: $134/month

This is a great deal NICE find!!!"

So its ok to plug in 4 variables, but the 5th variable (financing terms) is completely ignored! Yet in each and every post they use some magical 7% @ 30 yrs.

I'm saying that you should use a REAL WORLD financing terms, if in fact, your goal is to have $100 per door.

Hope this helps you Dave. By the way, did you notice that you wrote EXACTLY what I wrote in my post?? The whole line of 50% rule simply states 50% of rents is OE....

Mike,

When did I ever suggest that the length of the loan would effect your OE or NOI. When did I ever state that the debt service was part of the OE??? Please point me to where I stated anything resembling that. I beg you to re-evaluate your stance on this because I feel like you are being short sided when it come to the APPLICATION of the 50% rule.

Keep up the good work.

Kirk

(Uh oh, questioning the master?) I think my reading comprehension is pretty good by the way. The 50% rule has nothing to do with financing, it has to do with expenses. Different types of financing will produce more/less cash flow. Maybe it is your communication skills?