Thousand Oaks, CA · Member since 2017 · 11 posts · 5 votes
I've been reading about the 50% rule (a quick way to estimate expenses being 50% of gross rental income) and have tried to apply it to properties for sale and it always comes out consistently too high. The numbers I'm coming up with are that expenses are around 30-35% of gross rent. I just want to make sure I'm not missing something or being unrealistic.
In my area near Los Angeles, it would be realistic to find an average SFR for about 500K and have rent come in around 2500-2800/month. Assuming rent of 2700 here is what I'm calculating monthly expenses could be:
10% repairs and capex - $270
5% vacancy - $135
3% insurance - $81
17% property taxes - $450
Which comes out to 35% total. Is there something I'm missing?
Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
9y
The 50% is a VERY general rule of thumb. Expenses will typically be less as a percentage on higher dollar rents. Why? Think of the cost of an HVAC service call and repair to the monthly rental amount of $2,800. That service call and repair won't be much less at a property that rents for $800, but represents a lot higher percentage of the rents.
Investor · Littleton, CO · Member since 2017 · 66 posts · 39 votes
9y
@Chris Ruud The 50% rule is a rough go by for multifamily mostly. The SFR is will most likely me lower and the the higher priced nicer newer houses will be well under 50%.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
@Chris Ruud You are in California, the rules don't apply here. 90% of the RE books will not apply to anything in CA so toss what you learn and re-learn the CA way.
Your numbers are further complicated by the fact that your rents are far below what they need to be to produce cash flow.
Most expense costs are related to the value of the property. Expenses will be greater on a 500K property than a 200K property. This would include repairs, cap expenses, insurance, taxes, etc.
This would mean that you should be estimating expenses as a percentage of rent at $4500/month rather than your $2800.
Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
9y
The 50% is a VERY general rule of thumb. Expenses will typically be less as a percentage on higher dollar rents. Why? Think of the cost of an HVAC service call and repair to the monthly rental amount of $2,800. That service call and repair won't be much less at a property that rents for $800, but represents a lot higher percentage of the rents.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
It seems high because it is. The more expensive the property the more it's likely to be off.
But $500k house for $2500 in rent? That's horrendous.
This why if I were buyin in San diego today id rent. You can get so much more for your rental dollar than purchase dollar.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
9y
@Chris Ruud Was curious, so spotted check my actual expense ratios for my small MFRs in San Diego over the past 6 years. They're in the range of 28-40%. The larger the property, the lower the ratio.
That includes 10% GSI Capex, 4% of GSI management, 4% of GSI vacancy/loss, and 6% of GSI maintenance, along with actual insurance and property tax. Example from a triplex 2017 proforma that's 32% expense to GSI:
I use 4% mgmt because that's what I charge to manage properties when there's other investors participating.
Others on this thread could comment on how it plays out for large MFRs.
Thousand Oaks, CA · Member since 2017 · 11 posts · 5 votes
9y
Thanks everyone, all makes sense.
@Cody L. Right?? I admit I'm relatively new to this, but checking probably 100 different properties across 5 different suburbs of LA, monthly rents seem to be consistently 0.5 - 0.6% of the purchase price. Which is making me realize how important it is to begin using methods of locating properties that are off market.
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
9y
I own a lot of Single family rental that I completely renovated and then rented. The repairs you should budget for on a Single Family are 15% or more. I would then have 5% for Cap ex. Also you aren't including a vacancy rate, which I would put at 10% and utility costs? If you tenant pays utilities you may want to add in a small amount in case of a month of vacancy here and there. Also, I don't see management expenses. There are no admin costs(LLC set up fees, banking fees, bookkeeper fees, management software fees), city licensing fees, accountant fees, attorney fees (evictions do happen).
The 50-60% rule is for multi-family, but even with SF's you should count on at least 40%
@Cody L. Right?? I admit I'm relatively new to this, but checking probably 100 different properties across 5 different suburbs of LA, monthly rents seem to be consistently 0.5 - 0.6% of the purchase price. Which is making me realize how important it is to begin using methods of locating properties that are off market.
To each there own but I'm a 1% rule guy. And that's if I really like the area. Otherwise I want better.
Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
9y
@Chris Ruud I don't believe that the 50% rule is really true with SFH or small MF. As you get to the larger MF 50+ you start to see it more. If you are in a high priced area or specialized like student housing, you also see it lower due to the higher income coming in.
On a C 62 unit property in Houston we fought to keep it under 60% due to the age of the property and low rents. The 50% rule is a rule of thumb, not a firm rule.
It seems high because it is. The more expensive the property the more it's likely to be off.
But $500k house for $2500 in rent? That's horrendous.
This why if I were buyin in San diego today id rent. You can get so much more for your rental dollar than purchase dollar.
It's even worse in the bay area... I've seen 600k condos (with 5-600/mo HOA) rent for 25-2800. Granted many of the people renting at that price didn't pay 600k...
Investor · San Diego, CA · Member since 2017 · 54 posts · 30 votes
9y
@Todd Dexheimer You said he didn't incorporate a vacancy rate, but he did at 5%. You also suggest he use 10% but I think in SOCAL you are definitely safe to use 5% In San Diego, I don't really apply vacancy because the vacancy rate is so low in San Diego. My properties are not in a category that would stay vacant either. I put my property on a couple lists, and in 3 days I remove them just so I can start to funnel the 40 applicants I received. We don't get the 1% rule here but we sure don't worry about not being able to rent. This is nice because I have also learned through BP how to find great tenants. As a result, during my turn over I find there is less to repair. I give myself 10 days to turn over. 10 days of vacancy with a 3 year average on my tenants is a .9% I have had this vacancy rate on SFH for the last 8 years. This is also why as I explore buying in OH, TX, TN, or MN I have to retrain my brain to think about vacancy. It's such a dynamic equation, and each variable has a different weight depending on your market.
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
9y
@ryan phillips great job on achieving .9% vacancy rate. I am probably close to that right now as well over the last 2 years as Minneapolis has the lowest vacancy in the country right now. Every market is different and different underwriting applies, but I prefer to be conservative, so when over building does happen or rents do go down or when I need to evict a tenant I am prepared. Too often owners depend on everything working out great and then all of a sudden a tenant doesn't pay, a roof has a leak, the HVAC needs to be replaced, etc and they are stuck because they only cash flow $50/month in the perfect scenario.
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
9y
@Ryan Phillips if you know your vacancy is at .9% and you are budgeting $0 you are working with numbers you know are incorrect which makes no sense.... If he is being realistic about a budget he should include vacancy in running his numbers.
Separately I don't like any of the 1%, 2%, 50%, etc general rules. You can consistently find properties which meet any of these rules that may not be good investments. That being said I think these "rules" actually get in the way of people making sound decisions. Just my opinion.
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
9y
@John Woodrich couldn't agree more with the % rules. The rules should be used as a guide taken with a grain of salt, but too many people use it as truth. There are too many factors though. The 50% expense to income rule I tend to use the most, but I use it to quick gauge a deal with little information.
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
9y
@John Woodrich I agree it's great to get those up front if they are willing to share, but a lot of sellers won't give that until you either send a financing letter or often after a PA is signed. If you can get that information before hand, that is always best.
More specifically, while running those numbers, don't use %s for your expense estimates. Get actual numbers. Yes, you'll have to estimate repairs and vacancy and capex, but property tax and insurance should be actuals.
Run all that, and I think you'll pretty quickly see there's not a hope of cash flow on that property (or really any in LA).
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
9y
50% is a good rule of thumb if your rent is less than $1K. My Indiana properties hit 50 plus or minus every year for 5 years now. 50% is nowhere close to accurate for my Bay Area properties. ITs well under 30% because I self manage and vacancy is practically zero.
Investor · San Diego, CA · Member since 2017 · 54 posts · 30 votes
9y
@John Woodrich Oh no, I agreed that budgeting 5% for vacancy was good for SOCAL, and that he didn't need to budget 10% I was just stating that mine has been .9% for almost a decade now so that was just evidence backing up my statement that 5% should be plenty.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Chris Ruud I think everyone has hit in on the head, the rules only go so far in helping you make an assessment. Basically, they don't help once you have "real" numbers to plug in. Can you get property management services for 5%, 10%, 15%, $75/door? It doesn't matter what others pay, it only matters what you will have to pay. The same goes for an insurance quote, property taxes on a specific property, etc. When you look at vacancy you have to take into account what the general market bares but also your situation. If you self-manage, will do the paint touch-up yourself, etc. and you already work 60 hours a week it could take you two weeks to get it ready to show. A professionally managed property could be ready in 48 hours. So their (practical) vacancy projections could be different than yours. The bottom line is that rules are just guidelines for back-of-the-napkin analysis. So I'd *guess* your expenses will be higher than 35% (over the long-term) but maybe not 50%.