Not even close to the 50% rule, why are my calculations so off?

Question

When I've been analyzing deals, I've been getting numbers that are way off the 50% rule.

I  know that that's only a guideline, but I'm not even close. Am I doing  something wrong? Or am I being too high on my estimations of capex,  repairs, insurance etc?

Please advise??  Here's a fourplex example where my Cash On Cash calculates to $43 but the 50% rule would put it more at $670.  Why so far off?!  I feel like an idiot here...

https://www.biggerpockets.com/calculators/shared/3...

50% rule breakdown here:

Total Monthly Income: $2,960.00

x50% for Expenses: $1,480.00

Monthly Payment/Interest Payment: $810.70

Total Monthly Cashflow using 50% Rule: $669.30

thanks in advance!

-Chris

Russell Brazil · Answer

Step away from the formula and ask yourself, are you really going to spend $1,480 a month for expenses each month? If you are spending that much, something has gone horribly wrong in my opinion. Thats $18,000 a year. Now I dont know the specifics of the property....but thats like paying for an entire roof, hvac system and bathroom remodel EACH YEAR.

Chris Collins · Answer

Wow thanks for all the help everyone. I'll definitely re-think my analysis and see what I can do.

@Russell Brazil that is the kind of wisdom a new investor like me needs to hear.  I try to be so 'by the numbers' but stepping back and just thinking about 'the whole picture' is very helpful.

@Karen O. you've inspired me to be more realistic with my estimations.  I guess there's the part of me though, that wants to put conservative numbers in there, and if it still cash flows, then its OBVIOUSLY a good deal....?

Thomas S. I'll spend some time on your thread this evening and put on my 'learning cap'. thanks!

Matt Mason · Answer

It is your property taxes.  They are a whopping 3.3%.  Not sure if that is right as I know Texas has higher property taxes, but my guess is that your expenses will be higher than 50% if the property taxes are anywhere near that amount.

Karen O. · Answer

I completely understand wanting to be conservative.  But being over conservative isn't going to get your #s to work and may cause a good deal to look like a bad one.

Happy hunting.

Dustin Beam · Answer

@Chris Collins, I like to preface most my comments w/ "I'm not experienced" so you know to take what I say for what it's worth.

But I never understood using percent of purchase cost to estimate....really anything. CapX could vary wildly depending on how the property is set up. HVAC, roof type, 4 water heaters, single larger water heater, etc, etc, etc.

So I like doing a "real" analysis and input each item w/ average life, average cost, etc and then break that down for a monthly amount. Please see link below for a thread where you can find a pic of exactly what I did.

https://www.biggerpockets.com/forums/12/topics/293...

For what it's worth, I came up with a monthly CapX total for this single 4plex to be about $180/month (the pic in the link was for two 4plexes).

Brent Coombs · Answer

@Chris Collins, if your monthly cash flow is $669.30, why did you put $43.59 at the top?

ie. why is the formula you used for that box in your Report different than "Rent, less 50% expenses, less mortgage payments"?

I have calculated that if your P&I is $810/m, that means your deposit is around $65k? Right?

If so, that makes your annual CoC ($8,031 as a percentage of $65,000) just over 12%.

Not too shabby. Or, what am I missing? Cheers...

Thomas S. · Answer

Make your debt repayment calculation based on 100% financing not just your actual monthly payment. The cash buried in the property must earn it's keep otherwise your cash flow numbers are not accurate.

Karen O. · Answer

I'm no expert, but if your taxes, capex, repairs and PM estimates are accurate at almost 50%, there just isn't much left over for w/s, gardener, trash and insurance, let alone vacancies.

#1 Is it possible the rents are below market rate?

#2 Are you using estimates for all the expenses rather than actual #s? If so, any increase in rental income will result in corresponding increases in the expenses. However, the cost of the gardener, trash, insur and taxes are not likely to be affected by an higher rents.

#3 this may just be a project where positive cash flow will be elusive.

Not even close to the 50% rule, why are my calculations so off?

Most Popular Reply