A "rule"? In the sense someone enforces it? Absolutely not. Its just a "rule of thumb" that has been borne out by empirical data. There's nothing fundamental at all that says the expenses (really, operating expenses, capital, and vacancy) must be 50% of the gross scheduled rent. Further, there's nothing fundamental that says they should even be related.
If you've been reading you're seen the discussions. You're seen where people do offer numbers. Unfortunately one of the best large datasets is no longer available.
Some follks say 45% is a better number. 50% is just easier to calculate, especially if you do it in your head.
The 50% number is not an upper limit. No, you cannot assume expenses will be 50% or lower. Really, its a lower limit. If you do a good job and manage your properties well, you can get down to 50% (or a little better). You can easily get them to 65%, 80% or 150%. Since some screw-ups (e.g., fair housing violations) can result in the loss of your property, the upper limits is VERY high.
In any particular month or year the numbers for a particular property will almost certainly be much different than 50%. At the low end, you might have only taxes and insurance. If you have a tenant in place all year, no maintenance and no other expenses besides taxes and insurance, that's the best you can do. If you pay for management, take 10% off the top of the rent. More typically, you would have the management expenses, a turnover (which is another management fee, half to a full months rent in many areas), and some vacancy. So, a reasonable expectation might be taxes, insurance, a month's vacancy, half a month's rent to fill the vacancy, and some amount of maintenance.
Big ticket items, like furnances, roofs, and sewer lines, do need to be replaced periodically. Kitchens and baths need to be updated. If you own a handful of properties for a few years, you might avoid these. If you own 50 properties (which is the sort of number you need to make a living off rentals), and you are in this for the long haul, you're going to be replacing 2-3 furnaces ever year. And 2-3 roofs. And other big ticket items. Rather than being an occasional big expense, these things just become part of your routine annual costs.
Then there are the horror cases. A tenant decides to wreck the place. You have a run in with the city and get slapped with code violations and your tenants get evicted. A tenant stops paying and it takes six months to get them out. Again, a few properties for a few years and you may get lucky and never have these problems. Or, you may be unlucky and have one very quickly. Dozens of properties and in for the long haul and this sort of thing becomes routine.
Badly run buildings can have much higher numbers that 50%. I've looked at actual APODs (Annual Property Operating Data, a spreadsheet with income and expenses for a property) for real apartment buildings where the number was as high as 80%.
Its rare you'll see any meaningful data for a SFR. The data just doesn't get collected. The closest thing to good data would be the owners tax return.w
