can someone please explain this 50% rule to me?
Member since 2008 · 155 posts · 2 votes
I have heard from people on these boards that I can expect the operating expenses of the house I purchase to rent out would be about 50% of what I can get for it monthly. I could be misunderstanding it, but how is this so?
For example: because of the tax rates here, we can expect to generally pay in rents about 1% of the home value. this includes insurances, taxes, interest, etc. SO - a working example:
If I buy a $100k house for $70k (assuming i can get in at 70% value), and I can rent at $1k a month, how would $500 of that each month go to operating expenses?
That's exactly the way it is in my area also (and in many areas of the country). Rents generally run about 1% of the home value here. However, your statement that this includes insurance, taxes, interest, etc is meaningless. There isn't necessarily any correlation between what the tenant pays in rent and what the landlord pays in insurance, taxes, interest, debt, etc. That's why the vast majority of newbies fail in this business. They take in less money than they pay out.
What you pay for a house has ABSOLUTELY NOTHING to do with the operating expenses. In your example, it would make absolutely no difference whether you paid $70,000 for the house or only $10 for the house - the operating expenses would be exactly the same! Operating expenses include everything you spend to operate the business, but do not include the mortgage (principal and interest).
The 50% rule simply reflects the fact that throughout the United States, operating expenses run 45% to 50% of the gross rents. That includes taxes, insurance, vacancies, advertising, utilities paid by the owner, management, maintenance, entity maintenance, legal fees, evictions, damage done by the tenants in excess of the security deposit, capital expenses, lawsuits, etc, etc, etc. (I could go on and on). Some of these expenses don't occur on a regular basis (such as excessive tenant damage), yet the effect on the bottom line is still profound.
What type of business are you in? Whatever it is, you should still have operating expenses and the principle is the same (although the numbers may be different).
Mike
That's exactly the way it is in my area also (and in many areas of the country). Rents generally run about 1% of the home value here. However, your statement that this includes insurance, taxes, interest, etc is meaningless. There isn't necessarily any correlation between what the tenant pays in rent and what the landlord pays in insurance, taxes, interest, debt, etc. That's why the vast majority of newbies fail in this business. They take in less money than they pay out.
What you pay for a house has ABSOLUTELY NOTHING to do with the operating expenses. In your example, it would make absolutely no difference whether you paid $70,000 for the house or only $10 for the house - the operating expenses would be exactly the same! Operating expenses include everything you spend to operate the business, but do not include the mortgage (principal and interest).
The 50% rule simply reflects the fact that throughout the United States, operating expenses run 45% to 50% of the gross rents. That includes taxes, insurance, vacancies, advertising, utilities paid by the owner, management, maintenance, entity maintenance, legal fees, evictions, damage done by the tenants in excess of the security deposit, capital expenses, lawsuits, etc, etc, etc. (I could go on and on). Some of these expenses don't occur on a regular basis (such as excessive tenant damage), yet the effect on the bottom line is still profound.
What type of business are you in? Whatever it is, you should still have operating expenses and the principle is the same (although the numbers may be different).
Mike
Mike, I am the owner of a web development firm.
That makes sense as far as what you are saying goes. I was thinking that what people were saying is if I get in $1000, I would only have $500 to pay the mortgage AND pay myself. I guess the taxes and insurances werent something I had accounted for.
The pay yourself part comes out of the 50% expense portion. Typically to hire a property manager it would cost you 10% of gross monthly rents, so by managing the property that would be the money you pay yourself.
In your example if you had a $420 mortgage payment then your businesses + cash flow would be $80/month and you would be paying yourself $100/month (10% of $1000). So the total you would be making from the property would be $180/month. The $100 isn't counted as cash flow because it is not passive income, you are actually working for that money. In essence it's earned income it's just that the government doesn't see it that way unless your business is paying you a management fee.
-Michael
so if a rental brings in $180 extra a month, it isn't taxed? I guess I don't understand ... sorry for being so dense!
Taxes and insurance are part of the expenses. They're usually included in your mortgage payment, though. When doing this math, you have to separate the P&I (principle and interest) part of the payment from the T&I (taxes and insurance) part of the payment.
If you're going to manage them yourself, you can earn for yourself the part of the 50% that goes to property management. So, in that case, we can assume expenses of 40% of rent.
Rent: $1000
Expenses: $400 (40% of rent, this is money out the door)
NOI: $600
P&I Payment: $420
Cash flow: $180 (cash in your pocket)
Now, the payment you make to the mortgage company might be $520 to cover the full PITI payment.
Taxes are a different question. Easier to look on an annual basis.
Income: $12,000 (rent)
Expenses: $4,800
Interest: $4,800 (only the interest part of the P&I payment, just a round number for the example)
Depreciation: $2,000 (value of improvements / 27.5)
Taxable Income: $400 (12,000-4,800-4,800-2,000)
Tax: $112 (at 28% marginal rate)
So, the income isn't totally tax free, but very close.
Is is very easy to reduce or eliminate expesnses as well as risk when renting out a property.
As investors we should always be looking into ways to eliminate risk as well as expenses.
The first is to find a great not a good attorney a great one to handle evictions.
When renting out cover your risks up front with huge deposits.
don't rent to anyone your not 100 percent sure will care for the home and at the first sign of nonpayment of rent or not caring for the property give notice follow the rules and evict.
If you give an inch to renters they will take a mile.
You must not tolerate anything from your renters they are like small childern or puppies, always testing to see what they can get away with.
If you let your puppy pee on the rug without punishment then it will get worse every time he gets away with it.
If your renter is late serve a three day pay or quit immediately do not delay a minute......show them your serious about following the law and that you know what your doing. In most cases you'll see them straighten up right away and fly right.
Hmmm...you might be a good landlord, but let me recommend that you don't go into animal training...I don't think you'd be as successful... :)
mouschi -
In general, to figure out your cash flow (profit) on a rental, you follow the following steps:
1) Calculate your income
2) Calculate your expenses (not including mortgage/debt service)
3) Calculate your Net Operating Income (which is Income minus Expenses)
4) Calculate your Cash Flow (which is Net Operating Income minus debt service)
So, if your house rents for $1000/month (your income), and you pay $500/month for things like taxes, insurance, maintenance, property management, etc (your expenses), then your Net Operating Income is $500/month ($1000 - $500 = $500).
If you then pay $400 in mortgage/debt service, your Cash Flow is $100/month ($500 - $400 = $100). This $100/month is your profit.
The 50% rule states that your expenses (#2 above) can *generally* be estimated at half of your total income (#1 above).
Of course, this is just a generalization...it could be more or less, but it's a good rule of thumb for doing back-of-the-napkin analysis of a property.
Keep in mind that this 50% rule is a quick, "back of the napkin" calculation of the expenses and NOI (net operating income) and should not be the final decision maker to move forward or back out of a deal. There are many other criteria to consider including the fact that different properties, locations, etc. have different operating expenses.
I have seen many deals in which the investment did not hit the 50% rule, but was a good deal and others that met the rule and were poor deals.
Many members here have posted numbers from deals they are working on, only to have the 50% rule gurus calculate their deal and tell them there deal was very bad. Use what ever calculations you choose for your criteria, but keep in mind that there are many claculations & considerations to observe before moving forward on any deal.
It is true that sellers and particularly seller's agents, will make the numbers look as good as possible, attempting to hide or leave out expenses and inflate the gross incomes. It is your job to see through that and to derive a true and accurate financial analysis.
I have seen many deals in which the investment did not hit the 50% rule, but was a good deal and others that met the rule and were poor deals.
Hi Nationwide
Jus curious to know how the 50%-rule-deal and not-a-50%-rule-deal are bad and good respectively. Can you give a couple examples? I want to understand the math better.
Thanks much!
Ram
Ridiculous! Where are you going to find accurate numbers for SFHs or small multis? As I recall, you don't include all the expenses in your calculations, which is why you come out less than 50%. Pretending that expenses don't exist doesn't make them go away.
Clearly, you don't know what you're talking about. There is absolutely NOTHING for a deal to "hit" with the 50% rule. The 50% rule simply reflects the fact that throughout the United States, operating expenses run 45% to 50% of the gross rents. That's it!
Mike
Again, we can go back and forth forever about the 50% rule. It really has no real world foundation. In the real world, you need to calculate each investment on the numbers it is producing, not assume the OE is 50% or any other % for that matter. Mike will argue that in the real world, sellers do not ever provide accurate numbers on expenses. While that may be true, it does not mean that you can not figure them out on your own. It takes the know-how and experience, but it is not rocket science.
Yes! If you stop posting things that are ridiculous, I'll gladly not use that word again in relation to your posts.
Fortunately, I have the details from one of the deals that YOU posted:
Rental Income is $875-$925 per side/per month (we listed the low end)
Gross rents $1750
Taxes $222
Insurance $82
Management $140 (Original placement fees paid for, no other charges)
Repairs $0 (It is new with builder warranty)
Utilities $0 (Tenants pay all as wriiten in contract)
Maintenance $0 (Tenants pay all as written in contract)
Vacancy $0 (we have a variety of new tenants to choose from)
Vacancy $105 (Lets put 6% in there anyways to satisfy you)
Administration Costs $0 (Management handles everything for their 8% monthly fee)
Total Expenses $549 (should be $540 assuming the 6% vacancy reduce management fees, which is why I take vacancy out first as it Does affect the OE)
NOI = $1210
Debt Service = $906
Cash Flow with vacancy assumption = $304 ($152 per door)
I think that speaks volumes about how you calculate cash flow. You include "original placement fees" only, ZERO vacancy, ZERO maintenance, ZERO legal fees, ZERO for evictions, ZERO for utilities (I guess you don't need utilities during cleanup between tenants), ZERO for capital expenses, etc, etc, etc.
No wonder you claim a positive cash flow - you're pretending a BUNCH of the expenses are ZERO!
So, that's fair enough. You are the only landlord in the United States that has no Zero maintenance, Zero vacancy, Zero capital expenses, Zero legal fees, etc, etc, etc. Now I understand!
Mike
Aside from all the arguing, (which is very entertaining, so please don't stop! :D ) let's face it - the 50% rule is a good basic guideline to use when you are quickly running the numbers on a number of properties to decide whether to spend time trying to buy them. If you do use that rule, you will seldom find yourself in a bad position, unless of course there is that trend Nationwide mentioned where the rents are plummeting. If you are lucky, and/or control your expenses as much as possible, you reduce that 50% in reality and greatly benefit! But at least you were conservative. I think the reason Mike is adament about his guidelines and policies is that they have worked so well for him over the years, and he wants to share that reality with others so they won't unecessarily get into bad deals.
There's no arguing, we're just comparing our analysis techniques. My opinion is that you need to include all the expenses and Nationwide is pretending a lot of the expenses are ZERO! I'll leave it to the reader to decide which is correct, but I certainly think that these wild claims must be challenged every time they come up. To do otherwise is a great disservice to any newbies that might think that is reality.
I am not being conservative. The 50% expenses are the average over hundreds of thousands of units. If you own a lot of rentals or even a few over time, your numbers will trend toward the average. I am adamant about this issue because a LOT of newbies fail because they believe the nonsense presented by many "gurus" who seem to only present the rosey side of the business (minus expenses).
Mike
First, I absolutely agree that the 50% rule is a valuable tool for doing an initial assessment of a deal...
But, that said, the statement above is just plain incorrect.
Mike -
You'd probably agree that across the hundreds of thousands of SFH investments across the U.S., the average purchase price for those properties is around market value for their location (in fact, you'd probably agree with this almost by definition).
If I then said to you, "Mike, since you own a lot of rentals, your average purchase price for each of those is probably around market value for the location in which you bought."
Would you agree with that statement?
Of course not! Because you're not an average investor and you don't make average investments. You ensure through your techniques that the properties you purchase are well below market value. Regardless of what the "typical" or "average" investor does, you do better
So, what's to say that an investor who is specifically focused on minimizing expenses can't do the same thing? Or even that an investor can't do the same thing without even realizing it. For example, let's say that I focused my investing on areas that met the following criteria:
- Taxes disproportionately low
- Insurance rates below national average
- Only new or fairly new homes
- Had close contacts in the contractor business, who provided me great rates
- Ensured all multi-unit properties were submetered
- Had a brother-in-law who was an RE attorney
If those accurately reflected my criteria and my situation, I think I could safely say that my OE would be less than the national average, regardless of how many houses I owned.
The average is a wonderful thing to model against, but luckily not all of us (or the things we do) will trend towards it... :)
Again, that said, if you don't have any reason to believe you're not average, the 50% rule is a great one...
Thank you Jason! Your comments validate the point I have been attempting to make clear.
Capital expenses are capital expenses, not OE. Yes they occur and yes you need the cash to pay them, however, a capital expense reserve is all the investor needs. Mike claims he pays no taxes on his rental income (cash flow). I would challenge that. Mike buys a rental for $30k which he claims is worth $50k. The depreciation will be calculated on the building only (80% of the purchase, or $24,000). Divided by 27.5 years amounts to an annual deduction of only $872. His cash flow is $1200 minimum annually. Don't forget that the cap expenses he has allowed for in his 50% rule cash flow projections, do not occur each year and thus the cash flow was higher each year resulting in passive income tax. When the cap expense does happen, he is spending after taxed dollars and then that expense is depreciated over 27.5 years and not all at once. This is a accounting situation Mike has left out of his equation.
Mike also invests in areas in which he carries a fire arm to the site, is faced with crack heads and low lifes (as he states in many posts on BP as well as his own blog). Of course he has high operating expense ratios. Not to mention that these low income rentals produce low gross rents. So of course by percentages, his figures must be in the 50% or even higher range.
I am certainly not knocking his business model, it works for him, good luck with that. It is just not a business model I would like to have. In addition, if I was a newbie investor, and read Mike's posts and blog, I would be scared stiff to become a RE investor. If I had to do the things he does to earn his living, I would do something else.
Keep in mind that Mike operates a self-employed business. Looking back to Robert Kiosaki's book, the Cash Flow Quadrant, he shows that the left side of the income quadrant is earned by employees and the self-employed. The right side is earned from business ownership and investments. The main difference between business owner on the right and self-employed on the left is this: If the self-employed owner was to take a 6 month vacation, he/she would come back to find their business was no more. On the other hand, the business owner, who hires employees (property managers, contractors, etc) to do the work for them, comes back to find their business more profitable than when they left.
Mike does his own PM, repairs, etc. etc. which creates a situation in that if he is not there, there is no one to answer the phone call about the exploded water heater at 2am. In my business, I can work from my home office, from Europe, or from a cruise ship. All it takes is my laptop and a phone. I think Mike is so passionate about painting a horror story in his "education" product he sells on his website, because he wants to rid his competition. If all the newbies are scared away by these tactics, perhaps no one will challenge his business. Or perhaps he simply has a narrow minded way of looking at investing in RE. Mike, your way is not the only way to do things!
So for all newbies and seasoned investors, make your calculations based on the individual investment and the information your due diligence uncovers. By no means should you rely on a 50% rule or any other rule to be the deciding factor of walking away or proceeding with an investment. :roll:
Jason,
While I agree in theory that a person could search the country for an area where all the expenses are below average and you could have an uncle who would do your legal work for free, that still isn't going to reduce your operating expenses significantly - in fact probably not much, if any, below the 45% to 50% range. That's because the fixed part of the expenses normally won't vary that much.
Nationwidepi appears to be in the business of selling retail properties to newbies with the claim that his expenses are mysteriously low. Let's look at a deal from his website and see how his "deal" looks.
Rental Income is $875-$925 per side/per month (we listed the low end)
Gross rents $1750
Taxes $222
Insurance $82
Management $140 (Original placement fees paid for, no other charges)
Repairs $0 (It is new with builder warranty)
Utilities $0 (Tenants pay all as wriiten in contract)
Maintenance $0 (Tenants pay all as written in contract)
Vacancy $0 (we have a variety of new tenants to choose from)
Vacancy $105 (Lets put 6% in there anyways to satisfy you)
Administration Costs $0 (Management handles everything for their 8% monthly fee)
Total Expenses $549 (should be $540 assuming the 6% vacancy reduce management fees, which is why I take vacancy out first as it Does affect the OE)
NOI = $1210
Debt Service = $906
Cash Flow with vacancy assumption = $304 ($152 per door)
So, with stated expenses of $549 per year, his expenses are already 31% of gross rents! However, he left out the majority of the expense categories. Lets start with maintenance. HE LISTS ZERO FOR MAINTENANCE. He does that because he's selling these properties to newbies and has a home warranty. However, what happens after the first year? Oops, the newbie WILL have maintenance expense. In fact, even during the first year, the newbie will have maintenance expense because the majority of maintenance is caused by tenants, not by the age of things. Most landlords will see routine maintenance expenses at about 8-10% of gross rents, but since Nationwide claims to be exceptional, let's just say 8%. Now he's up to 39%! As I've said dozens of times, capital expenses are not technically operating expenses, but they still have to be accounted for and are about 5% of gross rents. Now, he's at 44%. What happens when he has an eviction? How about legal fees (I know what you'll say - maybe he has an uncle that works for free - LOL). What about damage done by tenants in excess of the security deposit? Utilities during vacancies? Placement fees after the initial placement. Etc, etc, etc!!!
The point is that in Nationwide's own listing, he's at 50% IF YOU INCLUDE ALL THE EXPENSES. We've had a lot of other people on this forum that claimed their expenses were well below the 45% - 50% range, yet in EVERY SINGLE INSTANCE, when they posted the numbers, their claims were not true.
Jason, if you live in an area where expenses are unusually low, post the numbers. I'd like to see one.
.You can challenge that all you like, but those are the facts. Obviously, at some point in the future, certainly when the loans are paid off, I will have to pay taxes on the rental income. Unfortunately, I am not a tax expert and can't have an intelligent discussion with you about my tax situation. I pay a professional to do my taxes and the fact is that every year for the past 5 years, I have not owed taxes on my rentals.
That's true. In fact, with apartment buildings, I specifically target distressed properties (distressed owners) which are often occupied by crackers. That allows me to buy at a huge discount. I evict all the crackers, clean up the property and find good tenants, which turns around the property (and often the entire block).
Quite the contrary, I have completely normal expenses, which by the way are identical to yours (as I proved above).
Now you're getting into more guru nonsense. I am in the rental business and yes I do work in the business. I change toilet rings; fix water leaks; paint; collect the rent; evict deadbeats, etc. What should I do - sit at home all day and watch soap operas? That's just silly. I like to get out there and do something each day. I'm not lazy!
Your comment about taking a 6 month vacation is more guru nonsense. First of all, I won't be taking a 6 month vacation. My wife and I certainly wouldn't leave our family for 6 months. What successful business person leaves their business for 6 months to go on vacation? Everyone in real estate talks about Donald Trump. I heard him say that he NEVER goes on vacation! I'm sure that he has fun, but he doesn't leave everything for 6 months to go sit on an island (I would be bored to death).
When I do go on vacation, usually to Hilton Head for a week or 10 days, my business will continue to operate just fine. During that 10 day period, I might get 3 or 4 calls from tenants who need something. If there is anything that can't wait til I return (very unlikely), then I can simply call a professional to handle it. For example, the mythical water line break at 2 am. That would take me about 2 minutes to call a plumber - problem fixed!
Since you have ZERO maintenance on your properties, I know that you've never had an exploded water heater! However, even though I do have maintenance (like every other landlord), I have never had the mythical 2am water line break. To directly address your concern, I use my cellphone as my business phone, so I can be anywhere and still get that "exploded water heater" call that you're worried about.
I don't paint a "horror story" about anything. I talk about the REALITY of being a landlord, which is what newbies deserve to hear. In addition, what competition am I trying to scare off? I have no desire to own every property in town. There are more than enough rentals and renters to go around. In fact, not only do I not consider myself in competition with the other investors in town, we actually work together. We pass leads (and deals) back and forth. We refer tenants to each other. Several of us even share an ad in the newspaper. We discuss our businesses openly and honestly trying to help each other. Competition? I don't think so. I'd consider the other investors to be an asset!
Even though this has been a lot of posting, I'm glad that we're covering this topic in such detail. This is a VERY IMPORTANT issue and deserves to be thoroughly explored.
Mike
Lets say that that the per hour labor rate is the same here as it is near you. What is the millage rate on your taxes and what percentage of your property value do you see your county appraising your property at? What percent of appraisal do you typically see for insurance? These will greatly change the 50% rule for your local. I know I can do my own math but I would like a paper napking percentage that I can have in my head for south Floridas insurance and high property value taxes.
Zach
James,
As you are well aware, we've had a bunch of people on here claiming operating expenses well below 50% of gross rents. NOT ONE has been true when the numbers were presented.
In the case of the son of one of your clients, it may well be that he's speaking of the expenses the way an accountant would do it. In other words, he's not including vacancy and/or capital expenses. We don't know because you didn't post any real numbers, but that is my suspicion. If you just add the capital expenses as I do with the 50% rule, that brings his range to 42% to 47% of the gross rents. In any case, 42% is very close to the 50% rule range (which is 45% to 50%, as I've posted dozens of times). It is also possible that with 500 units, he is enjoying economies of scale that the vast majority of landlords in the United States can't acheive. If that's the case, it isn't relevant to the new landlords on this forum, unless they are starting with hundreds of units.
For example, an accountant might look at the numbers like this:
Gross rents: $1,000
Vacancy 10%: $100
Adjusted Gross Rents: $100
Operating expenses $350
NOI: $550
Capital expenses: $50
Technically, the operating expenses would be 35% of the gross rents, but of course that doesn't include vacancies or capital expenses. When you include vacancies and capital expenses, the operating expenses would be 50%.
Mike
Wait a sec, Mike...I hate to use logic in a debate, but...
You said in an earlier post that the more units owned, the *more* likely the trends would be towards the average.
Above you say that the more units owned, the *less* likely the trends would be towards the average.
Yes, I realize you were speaking of two different phenomena (law of large numbers vs economies of scale), but you can't argue both sides in the same argument, which you clearly are.
So, which is it? Is the 50% rule *more* likely to hold true for owners of lots of properties or *less* likely to hold true for owners of lots of properties?
Of course, regardless of which answer you give (unless you disagree with both your statements), it contradicts your assertion that the 50% rule is a good one for *all* investors...
Btw, Mike, I'm not trying to be attacking...I actually really like your style of investing and your perspective on a lot of topics (I've learned a lot by reading your posts)...I just think you're taking a bit too dogmatic approach on this topic, and am actually enjoying the debate... :)
It's both! Here is a quote from Flipper about his guy with 500 units:
This is a situation that even the vast majority of successful landlords in this country will never have. With 500 units, you have economies of scale that few (including me) will ever have and probably NO-ONE on this forum has. That's 6% better than most managers charge (more if you include all the fees). Even so, that won't reduce the operating expenses very much (as I said earlier). However, the information that we're getting from Flipper is 3rd hand info and not backed up by any numbers. EVERY time we've gotten real numbers here, they have been in the 45% to 50% range.
I'm not saying that EVERY SINGLE PERSON in the entire United States has operating expenses EXACTLY in the 45% to 50% range every minute of the day. However, that is the average over hundreds of thousands of units and has proven to be correct with EVERY SINGLE PERSON that has posted the numbers on this forum so far, when all expenses were included.
So, Jason, what are you arguing here? Would you recommend that newbies use 30% or 35%? Would you recommend that they use the numbers from the seller? From their realtor? What would you use instead and where would you get accurate data?
You obviously didn't read my blog very carefully. I don't buy things that need a complete rehab and almost never buy anything that needs "major" repairs. My latest building is a 7 unit building that I bought $200K under market value. I needed very little rehab, but did need a new exterior paint job, which I'm working on. So far (in nearly 6 months), I've invested about $150 in the paint job, (for paint from Walmart) and the rehab consisted of replacing an old fuse box with a circuit breaker box (about $50), installing a new shower valve in one apartment ($94 with sharkbite connectors and pex), having one furnace repaired by a HVAC company (about $165 as I recall), and some carpet for one apartment that is on a slab (about $200) - plus my labor, of course. I have also had to deal with identifying and evicting deadbeats and causing enough pain for the criminals that had been hanging around to make them go elsewhere. I just spent about $1,500 to install an elaborate surveillance camera system with DVR, DVD backup, and remote viewing (so that I can watch them from any computer with the internet), but the surveillance will cover 2 of my apartment buildings. So, the rehab for this building will be about $3,000 (plus my labor).
In addition to the $3,000 rehab and the time I've spent dealing with the deadbeats, I also have spend about $900 on three evictions to date (with 1 to go). That $900 includes the filing fee and my attorney's fees. I do all the setouts myself.
People don't usually just hand over a property with $200,000 of instant equity unless the owner or property is distressed. In this case, the owner was VERY distressed over the terrible tenants he (his manager) had allowed to occupy the building and the trouble he was having with the city as a result (being fined repeatedly). I expected to spend some effort turning around the business. Is it worth some time and effort to pick up $200,000 in equity and end up with a nice building that will have a significant cash flow? That's up to you to answer. Here in Ohio, money doesn't appear without effort (contrary to the guru infomercials).
This was in an apartment that I had just finished cosmetically rehabbing before this tenant moved in! New paint, two rooms of new carpet, etc. Even so, this vandalism incident didn't cost me a single penny (in fact, I made money on it). I had the security deposit that the kid's father had put down (I'll bet he was mad about this stupidity). It took me less than a day to clean up the catsup; sweep, vacuum, shampoo, and mop the floors; skim coat their etching in the wall and touch up the paint; replace two broken outlet covers; etc. I don't work cheap and I'm keeping EVERY PENNY of their security deposit. So, I work for a few hours during the afternoon and make several hundred extra dollars! The apartment is already re-rented and I didn't lose a penny of rent.
As I said in my post, this was a tenant that I screened. I did everything right, but this scumbag still got in. I couldn't have done anything differently to change the result. It's just a normal part of the business. BTW, my eviction rate as I've been building my business has been about 1% per month. Once it's stabilized (with tenants I've screened), the eviction rate will be .25% to .5% per month.
Mike
Nope, I would (and have done plenty of times) recommend any new investors use the 50% rule...I do myself, and will probably continue to for quite a while.
But I also refine my model every time I get new data, and one day I'll find that the 50% rule is actually the 48% rule (or the 45% rule, or whatever) for me, based on my economies of scale, my location, my costs, my network of professionals, etc.
My only point is that experienced investors should trust *their own* numbers (including experience and historical data) more than the seller's, the realtor's, or even the 50% rule.
I think where we are disagreeing is, if an investor were to come on this board and said, "I have 100 properties with average OE of 44%, and I'm looking for another 100 properties...what OE should I use for my future analysis?" You would likely say, "Use the 50% rule as the more houses you buy, the more likely you'll trend towards the national average." And I'm more likely to say, "Use 44%, as the more properties you buy, the likely you'll trend towards *your* historical average."
Is the difference between what you believe and what I (and others here) believe such an important point that deserves so many posts? Probably not...
It's more about the fact that none of us want to back down after all this debating and let the other side feel they've "won"...and that's okay, it's pretty much what the Internet was designed for... ;)
"Some guys are quite a bit below 50% and I don't think it's because they don't understand expenses. "
They haven't had a tenant damage claim denied by an adjuster yet. :wink:
I had a claim with 2 chicago area investors who had $40,000 in tenant damage to the property. About $17,000.00 of it was legitimate vandalism with malicious intent. The rest was tenants living like pigs. There's no insurance coverage for tenants who live like pigs. That $23,000 in expenses averaged across years of owning the property takes the percentage down.