50% Rule | How To Analyze A Multifamily Property

Replied over 7 years ago

Good post Brandon. Good name too. My son is named Brandon also. This is a good rule of thumb to narrow down potential acquisitions. Time is money and time is precious and any help to save time is greatly appreciated by all. Newbies, please take note that the 50% rule is indeed just a rule of thumb and is not to be used as an overall analysis of a property before you buy it. Please do dig deeper before you make any investment decision.

Brandon Turner

Replied over 7 years ago

Thanks Alex – and yep, I agree completely. It’s just a quick rule of thumb. Thanks for the comment!

Yehoshua Kahan from Beitar Ilit, Not Applicable

Replied almost 4 years ago

So basically you’re going with the idea that it’s better to have false negatives–to turn down deals that might have worked out nicely–rather than false positives, accepting deals that end up hurting you financially. That’s about it?

Alec Ramsey Contractor from Cheyenne, Wyoming

Replied almost 2 years ago

Hey Brandon, i have committed myself to making real estate my career. I am 26 and my credit is poor, i am building a team, making connections doing my homework on flipping, attending investor meetings but i am indecisive on the angle i should take for my first project. If you could go back would you do a single family live in flip again?

Komi Kafui Aziagba

Replied over 1 year ago

Should there not be property inspection beforé the application of the 50% rule?…. to avoid ugly surprises.

Barbara Brown

Replied over 7 years ago

As a real estate attorney and landlord myself, I see investors and homeowners underestimate the actual cost of owning a home all the time. This is great advice for any investor. Gosh it’s a great way to think for a first-time home buyer as well.

Brandon Turner

Replied over 7 years ago

Hey Barbara, thanks for the comment. And you are right -it’s a great lesson for homeowners as well. I think they often believe the mortgage is all there is. Sadly, nope.

Brandon Turner

Replied over 7 years ago

Hey Barbara, thanks for the comment. And you are right -it’s a great lesson for homeowners as well. I think they often believe the mortgage is all there is. Sadly, nope.

Paul Grgurich

Replied over 7 years ago

Hey Bradon, excellent information…as always! I have two questions – hopefully they are not to dumb… 1. Do you – have you – or can you use an investor for the 25k down? 2. If so what would the arangement look like? Even with the whole 264 it would take forever to payback so you could start reaping the rewards… I am thinking this might not be such a good deal for that scenario. Thanks!!!

Brandon Turner

Replied over 7 years ago

Hey Paul, thanks! In answer to you questions: Yes, you could use an investor. I’ve done this strategy several times. I will split a deal with a partner, where he brings the cash and ability to get a mortgage (Good, solid job) and I bring the deal/experience and we split everything. It works well, but you really gotta find a great deal to make it work profitably. But 50% of a deal is better than 0%, so definitely consider the idea. Reply Report comment

Brandon Turner

Replied over 7 years ago

Hey Paul, thanks! In answer to you questions: Yes, you could use an investor. I’ve done this strategy several times. I will split a deal with a partner, where he brings the cash and ability to get a mortgage (Good, solid job) and I bring the deal/experience and we split everything. It works well, but you really gotta find a great deal to make it work profitably. But 50% of a deal is better than 0%, so definitely consider the idea. Reply Report comment

Brandon Turner

Replied over 7 years ago

Hey Paul, thanks! In answer to you questions: Yes, you could use an investor. I’ve done this strategy several times. I will split a deal with a partner, where he brings the cash and ability to get a mortgage (Good, solid job) and I bring the deal/experience and we split everything. It works well, but you really gotta find a great deal to make it work profitably. But 50% of a deal is better than 0%, so definitely consider the idea.

Roy Schauer

Replied over 7 years ago

I’m currently using that same idea with an investor on a property now. He brought the money and I’m doing the leg work. After its all done, he’s looking at making over a 20% return within 90 days and is very happy!

mark

Replied over 7 years ago

How does the investor cash out in 90 days with a 20% return? Are you flipping or buying and holding? I’m just trying to follow the math, so that I might be able to use this approach in the future. Thanks!

Justin F

Replied over 7 years ago

This video is very informative and clear! I’m just starting to do some preliminary analysis on properties in my area to see what the cashflow looks like (as practice- I’m still educating myself before making an investment sometime in the not too distant future), and this will help me pre-screen the properties I look into before doing a full analysis. Thanks!

Brandon Turner

Replied over 7 years ago

Hey Justin, thanks! Good luck, and if you need more practice, just jump on the forums.

Seth

Replied over 7 years ago

Another great addition to the BP video library – nice job Brandon. What kind of video editing software do you use for these things (or do you outsource it)? I like the blackboard feature on this one – really helps to make those numbers stand out.

Brandon Turner

Replied over 7 years ago

Hey Seth, thanks. I actually used Screenflow for the entire thing. Probably not the most ideal way to do video animation, but it is really easy. It just takes some time. Thanks for the support sir!

Loretta

Replied over 7 years ago

Brandon, great video. As a person who loves to “run the numbers” and do property analysis, the 50% rule is an excellent starting point when evaluating multifamily properties. The video format is also great for introducing people to BiggerPockets.

Brandon Turner

Replied over 7 years ago

Hey thanks Loretta! You are the pro, so that means a lot to me!

john milliken

Replied over 7 years ago

YES! great video Brandon. i just went though a bunch of old forum topics on the rule to gather what this rule is all about. it’s just a quick rule of thumb to weed out overpriced bad deals. once you see a potential positive cash flow deal, only then you can really dig deeper into analyzing the numbers. great rule.

Brandon Turner

Replied over 7 years ago

Thanks John. Yeah, it can be a tad confusing the way it’s explained sometimes, so hopefully this video is something I can point people to in the future. Thanks for the comment!

Julie Oldham

Replied over 7 years ago

Nice video, Brandon! I liked the blooper reel at the end. I’m wondering how you would use this rule for condos and town homes? I own a few of these, it makes good sense in my part of the country. There are significant HOA dues to pay on these properties, but I never have to worry about a yard, roof, exterior maintenance of any kind, and my insurance is much lower because I only have to cover the walls and everything inside of them. So I think I can reasonably expect that less than 50% of my rent will go to maintenance etc. Do you agree? And if so, what percentage would you use for your formula? I’ve only owned these places for about two years, so I don’t have a lot of history with their expenses, but so far they’ve been cash-flowing nicely. I’m also good at analyzing the financial docs and only buying where the HOA is fiscally healthy and well-managed with a small chance of any special assessments.

Shaun

Replied over 7 years ago

When I do a first pass on a condo I still just use 50%. Really instead of a lot of little expenses you have one big one for a bunch of covered items. Then you have the “Oh Crap!” buffer for an assessment rather than for a CapEx project. So similarly you do this as a sniff test and if it doesn’t stink part of your due diligence is seeing what the fee is and what it covers and the general financial health of the association to gage the likelihood of an assessment.

Brandon Turner

Replied over 7 years ago

Hey Julie, thanks – and those were only like 1/4 of my mistakes! 🙂 Honestly, I’m not sure how they would work with those kind of properties. I think I would lean more heavily on the other two methods I use for determining expenses, only because newer properties may have less problems. But maybe not? Might be a good question to ask on the forums. Thanks for the comment!

Tiffany

Replied over 7 years ago

We tend to use 40% expenses on condos due to the fact that hoa covers some of the expenses. Once again, just a rule of thumb. We haven’t heavily analyzed this.

Tiffany H.

Replied over 7 years ago

Also, when we use the 50% rule, it factors in 10% profit. So the $236 left over may be $236 plus 10% of the gross rents. More profit is better though, so using that 10% as buffer or icing on the cake would make it an even better cashflow deal!

Tony Tran

Replied over 7 years ago

Hey Brandon, The video was great! I am just curious about the shifting from left to right in the video. It kept my attention longer. Is that a strategy used by other video posters? Tony Reply Report comment

Tony Tran

Replied over 7 years ago

Hey Brandon, The video was great! I am just curious about the shifting from left to right in the video. It kept my attention longer. Is that a strategy used by other video posters? Tony

Brandon Turner

Replied over 7 years ago

Hey Tony, thanks! I’ve seen the strategy used a few times. I’m not exactly sure why they do it – but I bet you are on to something there. I think it’s more engaging. I dunno – maybe some people get annoyed! (hopefully not too bad!) Thanks for the comment!

Michael

Replied over 7 years ago

Great video Brandon. I like that quick analysis of the 50% rule. I agree you need a quck way to view deals and if it meets that criteria then you dig in deeper. Kind of like the 70% rule before you take it to the next level of due diligence. Love the bloopers at the end. Made me laugh because it reminded me of myself and all the retakes I had to do on some of my videos. Thanks for keeping it real!!!!

Brandon Turner

Replied over 7 years ago

Thanks Michael! And – yeah, I mess up all the time on those things!

Melodee Lucido

Replied over 7 years ago

Brandon, What a fun and informative video. I like how you kept it simple. I’ve read about this in the forums but your video brought it home for me. Yay! The back and forth of the left to right was kinda fun. Video can get soooo boring (said she with adhd). I’ve been looking at the 50% and 2% rules this week because my marketing brought in several possible deals for buy & hold investors. These rules are comforting in that it gives me—a newb in this area—a structure for evaluating. Thank you for your help!

Brandon Turner

Replied over 7 years ago

Hey Melodee! Thanks! Yeah, I like the jump cuts – cause I don’t have to memorize anything. I just write the script, my wife just reads me the line, and I say it. Easy Peazy!

Glenn Schworm

Replied over 7 years ago

Good video B. Do you do your own editing? I feel like I am closing one eye, then the other, then the other and so on! it keeps me engaged. I am still waiting for the shotgun scene to come back. I am still cracking up about that one!

Brandon Turner

Replied over 7 years ago

Hey Glenn, thanks 🙂 Yeah, I do my own editing and video work. It’s one of my favorite things to do, though my little laptop yells at me every time. I think I push this little machine to it’s limits! And yes -I’ll have to bring the shot gun out again sometime!

Josh

Replied over 7 years ago

Hey Brandon, great video! Do you have any on vacation rentals or do you have plans to cover this in upcoming podcasts. Thanks for all you’ve done to educate the real estate community! Josh

Brandon Turner

Replied over 7 years ago

hey Josh – I don’t have any (yet) but I definitely hope to cover it in a Podcast sometime soon. Keep an eye out!

Dominique Brown

Replied over 7 years ago

I use the 50% rule for purchasing all my properties! Typically my expenses are around the 20-30% range, so if the property works at 50% loss, then I have an amazing property in my books. Reply Report comment

Dominique Brown

Replied over 7 years ago

I use the 50% rule for purchasing all my properties! Typically my expenses are around the 20-30% range, so if the property works at 50% loss, then I have an amazing property in my books.

Brandon Turner

Replied over 7 years ago

Hey Dominique, thanks – that’s awesome to hear. Yeah, I think my expenses are probably less as well, but by using the 50% rule then I’m just happy when it turns out better, and not disappointed when that is all it does. Thanks for reading and commenting!

Shaun

Replied over 7 years ago

Good video explaining the 50% Rule. Since hearing about this the first time on BiggerPockets however many years ago I have used this as my first screen to see if it is even close to working. It has actually helped me consider more deals than I was before. I got so conservative in my projections after my first few places that I was usually close to 60% for my non-financing expenses for places. The first few places I got I over estimated rents (but not that bad) and under estimated my expenses (but not that bad), which with that combination lead to a couple properties and preformed kinda bad. 🙂 You should never buy based on something so basic and general, but it is a GREAT first screen to see where you can most productively put your efforts in evaluating further.

Brandon Turner

Replied over 7 years ago

Thanks Shaun, yeah – I learned about it here on BP as well, and it’s been a faithful companion!

John Fedro

Replied over 7 years ago

Hi Brandon, Excellent quick video. Love the 50% rule and you explained it without any effort. Love the graphics and the outtakes! Kudos, John Fedro

Brandon Turner

Replied over 7 years ago

Thanks John! I enjoy those graphics a lot -but they sure take a lot of time!

John Fedro

Replied over 7 years ago

Hi Brandon, Excellent quick video. Love the 50% rule and you explained it without any effort. Love the graphics and the outtakes! Kudos, John Fedro Reply Report comment

Scott Kelley

Replied over 7 years ago

Great info, thanks!

Brandon Turner

Replied over 7 years ago

Thanks Scott! Reply Report comment

Brandon Turner

Replied over 7 years ago

Thanks Scott!

Xuan

Replied over 7 years ago

Hi Brandon, Just clarifying, the mortgage payment you are calculating for the 50% rule – does it include taxes and insurance for total PITI?

Brandon Turner

Replied over 7 years ago

Hey Xuan – I only include principle and interest in my 50% rule calculations. I include the taxes and insurance as part of the expenses. Hope that helps! Reply Report comment

Brandon Turner

Replied over 7 years ago

Hey Xuan – I only include principle and interest in my 50% rule calculations. I include the taxes and insurance as part of the expenses. Hope that helps! Reply Report comment

Brandon Turner

Replied over 7 years ago

Hey Xuan – I only include principle and interest in my 50% rule calculations. I include the taxes and insurance as part of the expenses. Hope that helps!

kiz

Replied almost 7 years ago

Why don’t you include taxes and insurance when doing 50% rule calculations?

kev johnson

Replied over 7 years ago

this was great its Sunday morning,i am going to try and use this on Monday, you made it sound and look really simple. i will let you know how this works. i have no doubt that it will. it will be my very first transaction. thanks a whole lot!!

Stuart Stevens

Replied over 7 years ago

Using this simple formula, a ROI can be calculated by (50% * yearly income)/(cost). If the ROI is less then interest rate then a loan will reduce the ROI. In the example the income was 1600/mo and the cost was $125,000 producing an ROI of 7.68% based on 50% rule. With a loan at 5% with 20% down the ROI increases substantially to 18%. A loan at 5% interest will cost almost $5000 the first year. 50% of the yearly income (1600 * 12 / 2) is $9600/year. The yearly income is $9600 – $5000 for $4600. The cost is the $125,000 less the loan at $100,000 for a cost of $25,000. The ROI with the loan is $4600/$25,000 or 18.4%. The ROI does not include the principal reduction. The cash flow does include the principal reduction. So perhaps a rule of thumb is to make sure that the cash ROI is at least 1%(???) more than the interest rate.

Rob Lenderman from Bellevue, Washington

Replied over 2 years ago

Stuart, Please detail your calculation. I roughly get your 7.68% on a 100% cash deal. I don’t get your 18% on a 20% down. Your cost on a loan is more like $6400 a year and you exclude closing costs. It is closer to $3200/$30K or 10.6%. Now going forward you get roughly 18% if you exclude the closing costs but in that case you still used the downpayment. You cannot exclude closing costs as those are real costs and distort the IRR.

Stuart Stevens

Replied over 7 years ago

Hmmm, I can simplify further. If your target “all cash ROI” is 7.5% then the rent has to be more than the cost divided by 80. With a 80% loan at 5% your initial ROI/year will be 17.5% when the rent is cost/80. The cash ROI is income/divided by cost = (rent/mo * 12 mo * 50%) / (cost). The cost to monthly rent can be calculated from the ROI — cost/rent = 6/ROI. (first year ROI) (loan is 20% down and 5% interest) Cash ROI ROI with loan (cost/monthly rent) 4% 0% 150 5% 5% 120 5.5% 7.5% 109 6% 10.0% 100 (my minimum) 6.5% 12.5% 92 7.0% 15.0% 86 7.5% 17.5% 80 ROI with loan at 5% and 20% down is 5 * cash ROI – .2 cost/(rent/mo) = 6/(cash ROI) Take the current interest rate and add a minimum amount to give you the minimum amount you would accept then determine the multiplier above and make sure that rent is more than the cost divided by the multiplier. For example, at 5% interest rate and a target of at least 10% ROI with a loan, the rent has to be more than the cost divided by 100.

Stuart Stevens

Replied over 7 years ago

Hmmm, I can simplify further. If your target “all cash ROI” is 7.5% then the rent has to be more than the cost divided by 80. With a 80% loan at 5% your initial ROI/year will be 17.5% when the rent is cost/80. The cash ROI is income/divided by cost = (rent/mo * 12 mo * 50%) / (cost). The cost to monthly rent can be calculated from the ROI — cost/rent = 6/ROI. (first year ROI) (loan is 20% down and 5% interest) Cash ROI ROI with loan (cost/monthly rent) 4% 0% 150 5% 5% 120 5.5% 7.5% 109 6% 10.0% 100 (my minimum) 6.5% 12.5% 92 7.0% 15.0% 86 7.5% 17.5% 80 ROI with loan at 5% and 20% down is 5 * cash ROI – .2 cost/(rent/mo) = 6/(cash ROI) Take the current interest rate and add a minimum amount to give you the minimum amount you would accept then determine the multiplier above and make sure that rent is more than the cost divided by the multiplier. For example, at 5% interest rate and a target of at least 10% ROI with a loan, the rent has to be more than the cost divided by 100.

Todd

Replied over 7 years ago

My head hurts, lol. I’d love if you could provide an example of how to do this with real/made-up numbers..

stuart Stevens

Replied over 7 years ago

I recently looked at two duplexes with a total cost of $454,000. To get a 10% ROI, the monthly rent would have to be more than $4,540. The current and expected monthly rate is $3200. My offer would have to be around $320,000 which the seller would not have accepted. At a cost of $430,000, I calculated a ROI of around 5%. A loan would not have changed that. I passed on the properties. – Placer county, California

Todd

Replied over 7 years ago

Thanks Stuart!

Mehran Kamari

Replied over 7 years ago

I link people to this video on a daily basis and just realized I never commented on it! Awesome video Brandon, thanks so much for making it! It really helps people get a grasp of the expenses to expect and I think it’s almost required viewing when just starting out 🙂 Keep em coming!

Brandon Turner

Replied over 7 years ago

Thanks Mehran! 🙂

Chris S

Replied over 7 years ago

Brandon, thanks for posting the video. It helped to clarify my questions. Your post definitely address questions newbie investors like myself have.

Brandon Turner

Replied over 7 years ago

Thanks for the nice comment Chris! Glad to help!

Powell

Replied over 7 years ago

Het Brandon thanks for posting the video. I was wondering if there is an exact list of expenses that go into the 50% rule? -Powell

Shaun

Replied over 7 years ago

The 50% rule is meant to include EVERY expense not related to any financing you may have on the property. So it is meant to account for vacancy, management, taxes, insurance, utilities, maintenance, repairs, accounting, legal, reserves for CapEx etc. The thing about CapEx is important. If your expenses are really at 50% typically in years you are NOT doing capital improvements then you should be using an even higher factor since the idea is it smooth’s out over time. So you do better most years and then you replace a roof…

Grant

Replied over 7 years ago

Great QUICK TIP!!!

Rose

Replied about 7 years ago

Great video (especially the bloopers). What percent do you use for vacancy factor & do you use the same for sfr and multi-family?

David

Replied about 7 years ago

Brandon, Great breakdown, even for a person that wasn’t aware of the 50% rule beforehand. Btw, anyone ever noted that your profile picture looks similar to that of Morgan Spurlock? Certainly not a bad thing, just something I noticed. Thanks for all the great consistent advice!

Pamela L

Replied about 7 years ago

Hi Brandon, I am completely new to this and so I have been paying close attention. My husband and I would like to buy a 4 plex in Montana. The seller is asking $185K, we have to put 25% down and interest rates will be at least 5.25. Even if we offer 160K (25K) less than the asking price we cannot reach your 50% rule and earn $100 per month per unit. Each unit only rents for $440.00 per month. Is this something we need to walk away from? In MT property is high but wages (rent) is low.

Brandon Turner

Replied about 7 years ago

Hey Pamela, Personally, yeah I’d say that isn’t a great deal. Using the 50% rule, $1760 total income would leave $880 to pay the mortgage, and the mortgage on $120k (160x.75) is $662.64 , so you could reasonable expect perhaps $218.00 per month, which equates to a 6.5% return on investment. You could do better in the stock market and not get your hands dirty! 🙂 Granted, there may be other situations here, like if the tenants all pay their own water/sewer/garbage, or if taxes are super low, or if appreciation is looking really promising. But this doesn’t seem amazing to me. Hope that helps some!

Pamela L

Replied about 7 years ago

Thank you SO Much for your reply! I appreciate it so much. The place has low taxes but it does need a fair amount of work – mostly cosmetic and code stuff. It needs some flooring, smoke detectors, proper drains for hot water… and perhaps a roof – there is snow on it now so hard to tell. My husband thinks 30- 40k would easily get it up to where it needs to be. He is very capable. We are wondering if we got it for 110K maximum if that would be a good investment.

dan

Replied about 7 years ago

hey brandon, if i’m buying a multi-family investment property and i’m doing a fixed-rate mortgage, is it better to do a 15 year fixed rate or 30 year fixed rate?

Brandon Turner

Replied about 7 years ago

Hey Dan! Tough to say. 30 year will give you more cash flow, but 15 is better to pay off the loan quick. So I guess it depends on your needs and your strategy. I typically do 30 year, but I’m a cash flow investor.

Melanie

Replied about 7 years ago

Hi Brandon. I am currently looking at possibly investing in multi-units. I have some other property that will be closing escrow at the end of this month and would like to put some of that money in a property that will provide an income as well as holding value investment -wise. I would be managing them myself. There are limited options on the market in this area but I have honed in on a couple. First one is an 8 plex new construction. It’s located close to a very popular shopping locale but butts up to a neighborhood that’s not so great. However, I think it would always get renters just because of its overall location. They are 1230sq ft 3/2 prob get 1100-1150 rent. I think I can get into that property for 1,050,000. Second is 14 units located directly across the street from the University. The property has been completely renovated, top to bottom, inside out. Everything is new and re-done. It’s about 75% rented. Still in process of filling vacancies since the renovation was done. At this time they only have a couple of the units rented by students, but I’m thinking in the future, considering it’s location, that will be who will be renting. There are 9 – 2/1 and 5 – 1/1. Income is projected to be about 112,500 per year. The most I’d pay for this property is 1,100,000 but I know I won’t get it any lower than that. I have 700K to put in cash and will need to carry a loan on the rest. Besides any overall advice or insights you could offer, one of my main questions is – what are your thoughts about going new construction and the con of having to wait so long before it would start producing any income? And about the con of owning near the University and having to deal with renting to students? Both properties would be relative low maintenance as the one is brand new construction and the other has been completely renovated. Or….should I just walk away from both of these properties and keep looking? Thanks.

Brandon V.

Replied about 7 years ago

Brandon, Great video. Thanks for the info. I am looking into getting started investing in multi-family units and have a goal of a positive cash flow of $100 per door. After watching your video I am questioning the definition of a door now. Per your example of 123 Main Street in this video it is a triplex that will cash flow $264 for all three units per month, that would be only $88 per unit. Would you pass on this deal? Thanks for the clarification and help. Brandon V.

Brandon Turner

Replied about 7 years ago

Hey Brandon, Thanks! Yeah, if it’s only getting me $264 total for 3 units – yep, I’d pass. Granted, there may be other reasons why someone might want to buy it (like, if the tenants pay their own Water/Sewer/Garbage, or if the market is heating up and I thought prices were going to rise a lot.) Hope that helPS!

Brandon V.

Replied about 7 years ago

Brandon, Great video. Thanks for the info. I am looking into getting started investing in multi-family units and have a goal of a positive cash flow of $100 per door. After watching your video I am questioning the definition of a door now. Per your example of 123 Main Street in this video it is a triplex that will cash flow $264 for all three units per month, that would be only $88 per unit. Would you pass on this deal? Thanks for the clarification and help. Brandon V.

Brandon V.

Replied about 7 years ago

Brandon, Great video. Thanks for the info. I am looking into getting started investing in multi-family units and have a goal of a positive cash flow of $100 per door. After watching your video I am questioning the definition of a door now. Per your example of 123 Main Street in this video it is a triplex that will cash flow $264 for all three units per month, that would be only $88 per unit. Would you pass on this deal? Thanks for the clarification and help. Brandon V. Reply Report comment

Brandon V.

Replied about 7 years ago

Brandon, Great video. Thanks for the info. I am looking into getting started investing in multi-family units and have a goal of a positive cash flow of $100 per door. After watching your video I am questioning the definition of a door now. Per your example of 123 Main Street in this video it is a triplex that will cash flow $264 for all three units per month, that would be only $88 per unit. Would you pass on this deal? Thanks for the clarification and help. Brandon V. Reply Report comment

Brian Fredrickson

Replied almost 7 years ago

Brandon I wanted to find out what do you use for a single family home to weed out the bad and get the ones that you want to dive into and see if the numbers work? I have seen a ton on multifamily units but no rule’s of thumb for single family. Thanks Brian Fredrickson

Brandon Turner

Replied almost 7 years ago

Hey Brian, Typically, I don’t buy a lot of Single Family unless it just happens to fall into my lap. However, I filter first for location – there are only a few locations I want to own a long term single family house in – and then I look for size – 3 bedroom or 4 bedroom. Then I look for the rent vs. purchase price, and look for anything greater than the 1.5% rule – like would a home for $100,000 rent for at least $1500 per month? I won’t go any lower than that, typically, on a single family house anymore. Hope that helps! Reply Report comment

Brandon Turner

Replied almost 7 years ago

Hey Brian, Typically, I don’t buy a lot of Single Family unless it just happens to fall into my lap. However, I filter first for location – there are only a few locations I want to own a long term single family house in – and then I look for size – 3 bedroom or 4 bedroom. Then I look for the rent vs. purchase price, and look for anything greater than the 1.5% rule – like would a home for $100,000 rent for at least $1500 per month? I won’t go any lower than that, typically, on a single family house anymore. Hope that helps!

Andrew K

Replied almost 7 years ago

Brandon, The 50% rule excludes mortgage/financing payments. So, then, you are excluding Insurance and Taxes from the “50%” portion. Instead, they are going in the financing (below operating expenses) analysis. Is that correct?

Brandon Turner

Replied almost 7 years ago

Hey Andrew, I include the taxes and insurance as part of the 50%, though on larger properties, you may want to bump that up to 60%. (5+ units with property management.) Hope that helps!

Andrew K

Replied almost 7 years ago

Yes, very helpful. One follow-up question: you often mention wanting $100/door on properties. I assume that is without accounting for the tax reduction via depreciation. (When I include reduction in my taxes via paper loss of depreciation, it’s much easier to get to $100/door cashflow/month.) Am I correct in assuming that you want ~$100/door/month *before* accounting for the effect of taxes?

Brandon Turner

Replied almost 7 years ago

Correct, yep! I want $100 or more in my pocket when all is said and done.

max

Replied over 6 years ago

Hi. My name is Max. I’m new to RE investing. Thanks for video on 50% rule. I recently came across a 6 unit complex here in TX. Rural. Trying to do an analysis to determine whether to move forward with an offer or walk away. What should I be looking for?

Les

Replied over 6 years ago

Wow! Thank you so much for explaining the 50% Rule. I just found this site…and I am on the first step of wanting to create passive income …educating myself…and will execute a plan of action by November.

Casey

Replied over 6 years ago

Should the 50% included the property management fee? Or should that get added in afterwards like the mortgage does?

Alex

Replied over 6 years ago

Why are expenses a function of the cost of the property at all? For instance, take 2 multifamilys, one brand new and one run down. I would think rent would be lower and expenses would be higher on the older property (…and it would have a lower purchase price).

David

Replied over 6 years ago

Does this rule of thumb only apply for multifamily units? For example, could this be applied for 1-br co-ops in nyc? Thanks in advance.

Dan

Replied over 6 years ago

Haha, I liked the blooper reel, too. Nice. Brandon, where does property management come into the equation? In a few of the podcasts, you and Josh have mentioned that people tend to leave out management expenses, and that it’s smart to budget for it even if you intend to do it yourself (so you can later scale up and hire somebody). It’s already lumped into the 50% rule, right? I think in show 40 you said to budget about 12% for property management. I assume that’s for later in the process, when you’re working up a more detailed budget, right? This is the sort of question I am embarrassed to ask since I have a day job in real estate, but that’s silly. I don’t have the same team and systems in place that an established company does, so why should I think I can make the same financial assumptions I would make at work?

Dan Cotter Developer from Atlanta, GA

Replied over 6 years ago

Never mind. Found a good answer.

Matthew Jones from Moreno Valley, California

Replied almost 6 years ago

I love quick math! Great job on this Brandon, thanks. Cheers.

Eric Walters from West Sacramento, California

Replied over 5 years ago

Hey man, great video. Very concise. You’ve been very helpful in my learning about real estate investment. You’re obviously very experienced so I was hoping you could maybe respond to my forum post asking for advice. No big deal if you can’t but I would love to take some of your free time off your hands. If you do feel like it it’s here: https://www.biggerpockets.com/forums/311/topics/209460-buying-into-a-multi-home-property?page=1#p1402157 either way, thanks for the help!

Kathleen Nash Developer from Bellevue, WA

Replied over 5 years ago

Hi Brandon, thanks for the post. Is there a book you suggest to read about how to evaluate multifamily deals? Thanks!

Adam Goldline

Replied about 5 years ago

Great video Brandon. I love the 50% rule…in my experience it’s always better to run conservative numbers to protect you from unknown risks. I just bought my first duplex and I wanted to thank you for sharing your thoughts on real estate investing because they’ve helped me in my own analysis of potential rental properties.

John Hurlbut

Replied about 5 years ago

I think this is a good rule of thumb, however I think your property example is not very realistic. And honestly I don’t know of a property now (at least in my area) where you could get this. So another good rule of thumb is that if Gross Rents are equal to or greater than 1% of the purchase price, the property is a no-brainer for purchase. i.e. if you have a property listed at $200,000 and it’s bringing in $2,000+ in gross rents, it’s a no brainer to purchase that property. (Obviously do all your due diligence on the property before purchasing, but in general that will work out to true every time) In your example the property is listed at $125,000 but the gross rents are $1,600!!! That means at a minimum that property should be selling for $160,000+ When you take the property up to $160,000 and do the 50% rule on it, it’s not quite as swanky. Also, I’m assuming you’re including your property taxes and insurance in the 50% expense category as typically those will be lumped in with your mortgage payment, but your example left those out of the mortgage payment.

Account Closed Real Estate Investor from Elgin, Illinois

Replied about 5 years ago

Are property taxes included in the 50% we are counting as operating expenses?

Brandon Turner Investor from Maui, HI

Replied about 5 years ago

Hey John – yes, usually. Just remember, it’s just a rule of thumb. Some of my properties are 40% expenses, some are 60%. It all depends!

Andrew Reyes Investor from New York, NY

Replied over 3 years ago

Hi Brandon, I am looking at a property in in Queens, NY. 4 Units, average rent for the area is say 2,500/month. sing 50% rule I estimate 5K in expenses. My issue is that property taxes were 50K last year (4,166/ month). Is it reasonable to assume all other expenses are only 834/month? Thanks for the knowledge!

Andrew Reyes Investor from New York, NY

Replied over 3 years ago

Hi Brandon, I am looking at a property in in Queens, NY. 4 Units, average rent for the area is say 2,500/month. sing 50% rule I estimate 5K in expenses. My issue is that property taxes were 50K last year (4,166/ month). Is it reasonable to assume all other expenses are only 834/month? Anyone have success using this rule in NYC? Thanks for the knowledge!

Jayson Tarantino

Replied about 5 years ago

Does this rule still apply for owner occupied multi family homes? If not, is there a good rule for owner occupied? I am in the middle of purchasing a 3-unit and plan on moving into one of the units. Obviously the rental income will be reduced by 1/3, but I am more referring to the mortgage payment. I plan on using FHA financing at only 3.5% down meaning my payment will be much higher than if I put 20% down, but will allow more cash in my pocket. Do you have any tips or advice for this scenario?

Farouk El Khatib from Milford, Massachusetts

Replied almost 5 years ago

Brandon, I’m in a similar situation, your help would be greatly appreciated!

Mitch Hartmann from Greenland, New Hampshire

Replied about 4 years ago

Hey Brandon, I’m also in a similar situation as @Jayson, going the FHA route but with a 2-unit. Would like to know if there is a rule for owner occupied as well. Thank you.

Bazia

Replied over 4 years ago

I am also considering a multifamily and occupy a unit. Our single family market is crazy hot right now but multi families are reasonable. Need to move due to mold issues and hoping this would be a better investment. Sit it out in the multifamily until market calms down to realistic levels.

Mohammed Feddah from Riverside , California

Replied over 4 years ago

Simple and useful, Thanx!

Oscar J Osorio Investor from Marysville, Washington

Replied over 4 years ago

Hi Brandon, I bought 2 of your books, great info, I have been reading them a lot and love the analysis, but could you please help me with the numbers, since your numbers seem based on a 30 year loan, how do those numbers work if i’m only getting a 15 year loan and help me also understand if there is a rule of a certain loan amount that only gives you a 15? Thank you

Ricardo

Replied over 4 years ago

Does anyone have any resources for someone looking into selling his current home in order to get enough money for a down payment on a multi family investment? It’s an idea that just occurred, I plan on living there myself and gaining some experience on investing.

Dawid Surowiec

Replied about 4 years ago

hello I am looking at a 4-plex house. 2bed 1bath on the 2nd and 2bed 1.5bath on the first floor. I live in north jersey. the asking price is 420k, property tax is 13,500/yr. if i put down 20% my monthly payment will be 2,770. i can collect 1,300 from each tenant..5,200/50%=2,600-2770=-170 so this house doesnt meet the 50% rule, this will be my first home so i could live in one unit and rent out the other 3 units. thats why im interested in the property. would this be worth the chance?

Rafael Raygoza from Minneapolis, Minnesota

Replied about 4 years ago

Brandon I am doing tons of research and can’t figure out how I can get that good of a deal to get near the 50% rule . How can I find these ? If there isn’t many for sell in my area Minneapolis , is it ok to buy just to break even in hopes to sell in the future? Do I wait till the housing market turns into a buyers market?

Rabbt

Replied almost 4 years ago

@Rafael and @Brandon, I think the answer to your question lies in the answer to a question I have… does the 50% rule assume you are investing specifically for the purpose of maximizing cash flow out of the property? In other words, Brandon is talking specifically about real estate investing, beating the stock market, and eventually living off the rent paid by your tenants. My suspicion is that this is only possible where the market is expanding and a lot of tenants are willing to pay high rents. I think there are many markets which will not bear this strategy. For example I live in CT outside New York City where prices are very high and market is saturated, so even a fixer-upper that needs $100k of improvements might not satisfy the 50% rule at 20% down… but at the same time, if you wanted to live in one of the apartments, it would be a lot more economical than buying and living in a single-family home.

Joe Allen from Knoxville, Tennessee

Replied over 3 years ago

Brandon: Please advise What is your minimum cash flow per door on a multi-family complex

John Pants

Replied over 2 years ago

Hey Brandon, would this apply to an area like Los Angeles, where it seems like people are happy if the rent just covers the PITI and are banking on appreciation? Thanks!

Ozzie Delgado from Pembroke Pines, FL

Replied over 2 years ago

Hey Brandon! Thanks for the great video. However, after doing my math separately, I noticed that your example does not take into account property taxes and insurance on a monthly escrow basis (unless you include that separately on “Expenses”). If you include those things, you are either in the red or close to it. Can you elaborate on this please? Thanks!

Cesar A Blacido

Replied about 2 years ago

Great Video. Thank you for the information! One question- is this only applied to multifamily homes or would you apply this to a one family homes too?

John Zellner New to Real Estate from Pasco County

Replied 11 months ago

Nice and concise. Helpful to know and apply for potential investments. I knew I should have done better in math! :)

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The 50% Rule: How to Quickly Analyze a Multifamily Investment Property [Video]

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