Am I understanding the 50% "rule" correctly?

Question

Hi, I am looking to purchase my first multi-family property. From everything I read on posts and hear on the podcast the 50% rule says that you should save 50% of your rent to cover expenses and the other 50% should cover the mortgage PLUS give you $100+ in cash flow. Is this correct? Would this apply to me if I am using an FHA loan and only putting 3.5% down? My mortgage would be higher with the small down payment. Should I even expect cash flow with that downpayment or does this rule only apply to 20% down?

Joe Villeneuve · Answer

The 50% rule, like the rest of the "% Rules", are guesstimates designed to ruin good deals and lead you into bad ones.  You can't use a generic rule as a criteria for real estate investing.  It's just being lazy and/or trying to make up for a lack of analysis ability.

Learn how to analyze property properly (say that again 5 times fast).  Each property, in each market, with different rehab needs, are dramatically different.  You can't use a blanket rule to analyze them all and be successful.  You will miss good deals (and never know it), and walk into bad (and not know why).

It comes down to dollars and sense (common).  I've never spent a "%", and I've never re-invested a "%", and I don't see that changing in the future.

David Light · Answer

Hi Nathan, the 50% rule is a quick test to analyse properties quickly. It's specific to the expenses saying that over time 50% of gross rents will go to operating expenses. The remainder of rent would cover your financing, whatever form that is, and then you can calculate cash flow. Some people look for 100/door others look for 200/door depending on their market and requirements they've developed.

If you're offering on a house it is worth doing a full work up on the house to estimate expenses in detail rather than just using the 50% rule. There's a BP rental calculator that can help with that.

Hope this helps!