Bethlehem, PA · Member since 2015 · 6 posts · 0 votes
For example: i wanted to know if I had rent coming in at $1000 and mortgage is $400, which the rule states that 50% of the income will go to expenses and the other will pay for the mortgage and the reminder will be the cash flow. So I'll put $500 in the expenses column and the other $500 I'll use to pay $400 for mortgage and then keep $100 in my pocket. But what if for a whole the unit or home doesn't need any fixing just painting will I still keep that $500 in the expense column or I then put it in the cash flow column since I don't have to use it?
Rental Property Investor · Greater Lansing Area, MI · Member since 2014 · 196 posts · 55 votes
11y
Hi Demar. I too had a hard time wrapping my head around this concept at first. What I have learned is that it's more a rule of thumb that tends to happen over time (not necessarily every month) that 50% will go towards expenses. I posted the same question a few months ago and BP members were really helpful in walking me through the understanding. Check out that thread here.
Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
11y
Hello Demar,
Half the rent would go towards expenses- these are the repairs, utilities, maintenance, taxes and insurance. The other half goes towards the mortgage payment- principal and interest, then the rest is cash flow. If you have no mortgage then half the rent is cash flow by this rule of thumb.
Rental Property Investor · Greater Lansing Area, MI · Member since 2014 · 196 posts · 55 votes
11y
Hi Demar. I too had a hard time wrapping my head around this concept at first. What I have learned is that it's more a rule of thumb that tends to happen over time (not necessarily every month) that 50% will go towards expenses. I posted the same question a few months ago and BP members were really helpful in walking me through the understanding. Check out that thread here.
Specialist · Sibley, LA · Member since 2014 · 1k+ posts · 190 votes
11y
Hi @Account Closed
I will like to welcome you to the most incredible real estate website in the world. There are thousands of great members of BP willing and ready to help.
Bethlehem, PA · Member since 2015 · 6 posts · 0 votes
11y
thanks Antonio I can see that already Lol... Its overwhelming to see that I've ask just one question that lead to so much information that was well needed.
Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
11y
@Account Closed
Hi and welcome to BP! The 50% rule is of very limited use to me. It is good only in terms of thinking very conservatively about the investment going forward for the long term, but whether it is applicable in any particular case depends greatly on the investment.
Bethlehem, PA · Member since 2015 · 6 posts · 0 votes
11y
thsnks Larry, most of the investment will be buy and hold rental properties.. I was wondering if there is any more rule of thumb I could possibly use..
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Account Closed- welcome to BP Nation!
50% Rule of thumb says - 50% of the income will go to cover the Operating Costs. Operating Costs are all costs of operating the building not including the debt service.
This is a very loose guideline. Please be sure not to make a buy decision based on this rule of thumb.
50% Rule of thumb says - 50% of the income will go to cover the Operating Costs. Operating Costs are all costs of operating the building not including the debt service.
This is a very loose guideline. Please be sure not to make a buy decision based on this rule of thumb.
Hope this helps!
So the the 50% rule excludes capex?
These crazy rules! No wonder people are spending cash flow that isn't profit.
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Account Closed - whether CapEx is above the fold or below is a function of whom you talk to. Marcus & Millichap guys will tell you that it's below. In my pro-forma it is above - part of operating costs...
In real world, CapEx is a never-ending struggle which impact CF in substantive ways. The reason the big brokerages invented the notion of CapEx beneath the fold is precisely because it is extremely difficult to make a building look good on paper when accounting for al of the true operating costs. CapEx is an easy target to shave, and folks who don't know much about how much it costs to run property, actually buy into the nonsense...
@Account Closed - whether CapEx is above the fold or below is a function of whom you talk to. Marcus & Millichap guys will tell you that it's below. In my pro-forma it is above - part of operating costs...
In real world, CapEx is a never-ending struggle which impact CF in substantive ways. The reason the big brokerages invented the notion of CapEx beneath the fold is precisely because it is extremely difficult to make a building look good on paper when accounting for al of the true operating costs. CapEx is an easy target to shave, and folks who don't know much about how much it costs to run property, actually buy into the nonsense...
This is why 50% is bull...haha
But @Ben Leybovich now you are creating a whole new fake definition of operating expenses. Which leads to people calculating crap rates! Capex is not a part of operating expenses. How would you even come up with a meaningful number that wasn't a WAG and then to distort that number even more by capitalizing it!?
I think you will find that there is a consensus among real estate professionals that capex is NOT a part of NOI. But it could be a part of the 50% if you want it to be since that is not a professional real estate term/concept.
Omaha, NE · Member since 2014 · 201 posts · 85 votes
11y
@Account Closed
One thing to keep in mind, the 50% rule doesnt work on low end properties. That $400 water heater costs the same regardless if you pay $100k or $10k for the house. But your rents will likely be substantially different for the two properties. This is why the 50% rule is so deceiving.
example, a single family house that rents for $500/month, 50% rule wont work, expenses will be way higher if you look at them as a percentage of rents. just something that in mind.
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
ARGHHHHHH..... I would like to start a 40% rule that includes capital on the 5th and 15th days of the month. It will also include utilities paid by the landlord on properties that have been on the market for more than 33 days unless it is being used to calculate the IRR.
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
Sorry for the hijack... Build a model for your expenses and income based on your location and the property types that you are looking at. Flush the 50% rule down the toilet where it belongs.
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
Here's the logic, @Account Closed.
There are 2 kinds of numbers that go into CapEx:
1. Expending of Delayed maintenance.
2. Accrual of replacement costs
The 1st is a below the fold item - it is a one-time expense which makes sense below the fold. You capitalize value and subtract the immediate repairs to arrive at a fair purchase price.
The accrual numbers, however, are recurring monthly/annually. If you put those under the fold, then the capitalized value is missing one of the biggest reoccurring expenses of running property. You can do it any way you like, but I'll call a spade a spade - if it takes money out of my cash flow every month, it's an operating cost :)