50% rule

[Brandon Cooper]

Does the 50% rule apply to everyone? The reason I ask is I have notice numerous people pay for utilities for their property when renting it out. Here in California this is not common as the renters themselves are responsible for paying utilities, in most cases. The 50% rule seems ultra conservative and very difficult to obtain in the ca market. Thanks

[Jon Holdman]

There's an existing extensive discussion about the 50% rule.

The 50% rule is simply a way to estimate how much you will spend on capital and expenses plus how much you won't collect in rent due to vacancy. Its not something you obtain. It is an estimate of what you will experience. It is true that if you do experience 50% of your gross scheduled rents going to expenses, capital and vacancy, and then you have to pay your debt service payment that you will be cash flow negative on many properties. But that calculation is telling you what's going to happen.

Based on experience provided by people with a number of rentals over a long period of time this estimate is NOT "ultra conservative". Rather, it is what you will experience over the long haul if you do a good job of managing your properties. For any particular property in any particular year your results may be somewhat better (taxes and insurance at the very lease, property management if you're using that) but can also be much, much worse.

Owner paid utilities can make your actual results worse. As can extensive deferred maintenance or the need to make a number of big capital improvements over a short period of time. But even if the house has, say, a brand new roof, 20 years from now its going to need replacement. So, you need to budget for that as you go along.