Property Manager · New Orleans, LA · Member since 2013 · 184 posts · 34 votes
Does the 50% rule apply to single family homes? If so, what is a good cash flow spread to expect? The property I am looking at will probably yield about $250/month cash flow according to the 50% rule. Is this enough?
The 50% rule is just a rule of thumb that states about half of your rental collections will be consumed by expenses. I do a little bit better on some of my properties, at the moment. These are properties with long term tenants (property turnover and vacancies are some of the biggest expenses) and properties that had been very well maintained when I bought them (the month you have to put in a new water heater, furnace or roof will be negative cash flowing months). If those stable tenants move out and repairs start piling up that situation will change. If your calculations show that you will be cash flowing at significantly more than 50% you may want to reexamine your assumptions.
Is $250 enough? That is up to you. If you have properly figured your expenses (including vacancies and maintenance) and are putting $250 profit in your pocket every month that can be maintained just about forever. Did you remember to include property management in your expenses? If not that $250 is really just going to pay you for the time you will put in on your new part time job. Is it enough for you? What will it cost you if you want to hire someone else (a property manager) to do it?
Also keep in mind that the 50% number includes paying for a PM. If you manage the properties yourself, you can earn that slice for yourself.
To be clear, the 50% number does not include any principle and interest payment. So, if you buy a house that rents for $1000 with cash, you can expect cash flow of about $500 a month. Many months more, some months much less or even negative. For example, when you pay for that roof, you're probably in the red $3000 that month.
If you have a P&I payment of $350 on that house, your cash flow falls to $150.