50% Rule not working for me

13 Replies

Hi Everyone!  Newbie here...I am looking into Buy and Hold properties  and am trying to start with a single family house.  

I’ve been comparing House listing prices on Zillow and other websites with nearby rental rates for similar houses. When I do this, not a single property seems to meet the 50% rule in the DC suburbs (Maryland)...is that due to the location? The market? Or is it a problem with the way I am calculating things?  Maybe I just need more patience to find a deal?

Happy to be a part of this forum and to learn from you all.  Much thanks in advance. 

Originally posted by @Andy H. :

Hi Everyone!  Newbie here...I am looking into Buy and Hold properties  and am trying to start with a single family house.  

I’ve been comparing House listing prices on Zillow and other websites with nearby rental rates for similar houses. When I do this, not a single property seems to meet the 50% rule in the DC suburbs (Maryland)...is that due to the location? The market? Or is it a problem with the way I am calculating things?  Maybe I just need more patience to find a deal?

Happy to be a part of this forum and to learn from you all.  Much thanks in advance. 

 The 50% rule is really only applicable in sub 100k properties.  It is not a rule to be used for all property types and locations. 

Thanks for your help Brie. Is there another quick rule of thumb that I can use instead to help me with >100k SFH properties? Want to be able to rule out bad deals quickly and potentially rule in other deals for a more detailed analysis.

Generally for most markets that are above 100k SFH you want to use the 1% rule (sometimes called the 2% rule for legacy users). The rule is collect 1% of rent for what the house would cost you. So if you buy a SFH for $500k you should expect $5,000 a month in rental income. Note that is not profit, but rent collected. Slight variations is 1% of what you financed vs purchase price (example a 20% down would bring your SFH to $400k financed so you should expect $4,000 a month).

My guess in the DC market, depending on your investment goals, the 50% rule isn't really going to work due to how expensive it generally is there.

Tag @Russell Brazil since he knows the area much better than I could possibly hope to and he might be able give more insight.

It sounds like it is working. It's preventing you from buying a deal you shouldn't.

You can settle for a bad deal, look in another market where houses are cheaper, or be patient. To find something you're going to have to get out and meet people though, the chances of finding a good deal on the computer are slim to none. 

Originally posted by @Andy H. :

Thanks for your help Brie. Is there another quick rule of thumb that I can use instead to help me with >100k SFH properties? Want to be able to rule out bad deals quickly and potentially rule in other deals for a more detailed analysis.

 No, because expenses are going to vary depending on the market, sub market, and asset class.  I invest in two markets and each has their own calculations I use for expenses

@Andy H. ... there are so many difficult aspects about being a landlord here in the Metro DC area. One of them is just the actual cost of the land. It is so expensive to begin with, that often the owner is better off to tear it down and build new. I found a home with a tree on it and the land alone was $350k... the owner had it listed for $425k and it sold for $420k. The demand and the constant turnover are also local factors that make it difficult. Additionally... there is also the exceptionally low inventory for multi-family homes outside of the DC city limits. DC is a different animal though. There are PLENTY of multi-family homes available in the city, but the rules for tenant's rights are very strict in the city. If you rent a property in DC you also have to have the property inspected by the city and you will be required to get a business license. It's not easy & it not cheap to be a landlord in DC. DC is also considering a bill to ban owners from AirBnB'ing their homes if they are 2nd homes. There is a lot to consider and a "50% rule" will be the exceptional experience here. 

Thanks for the tag @Michael Randle . @

@Andy H. undefined The 50% rule is not applicable to higher priced properties. Just think about it in terms of dollars instead of percentages. I have a single family in Rockville that rents for $3,000 per month. Could you imagine if I was spending $1500 a month on operating expenses? Thats like the cost of an HVAC, Water heater and roof being replaced every single year.

Price/rent ratios in the DC suburbs of Montgomery County and Fairfax county tend to hover around 0.6% or so.  They will be a little higher in PG County, and that is reflective of PG County being higher risk than MoCo and Fairfax.  They will be considerably higher in Baltimore, which is reflective of Baltimore being a considerably higher risk market than DC or it's suburbs.

The price rent ratio, just like a cap rate is indicative of the risk of the market. The higher the ratio or the cap rate is, then the higher the risk of the market or asset.

The 50% rule is really more for apartments than houses and even then it's only a rule of thumb that can vary based on the price (cheaper properties will be more than 50%) and who pays the utilities, etc. 

@Russell Brazil Thanks very much!  What you say about operating costs makes a lot of sense.   By Price-Rent Ratio, do you mean:  Purchase Price of House/Annual Rent Income (this number doesn't jive with 0.6%), or is it being defined as something else?  

Much appreciated.

Monthly rent divided by property value/purchase price.  So a property that rents for $2700 and purchased for $450k has a 0.6% ratio. A property that rents for $1200 and purchased for a $120k has a 1% ratio.  

When people talk about the 50% rule...they are typically talking about a 2% property, and that is because the rent and the properties value are so low, that a large portion of the rent gets eaten up by expenses. Like a $900 a month rental on a $45k property.

Thanks guys!  I had this same question a couple of weeks ago.  I am in Montgomery County, PA which is right outside of Philly.  When I analyze operating costs including 10% property management, 5% maintenance/repairs, 5% deferred maintenance, property taxes, insurance, and a 5% reserve around where I lived, I am somewhere between 48 to 60% of the monthly rental income.  I've been analyzing duplexes, triplexes, and quads.