Elements of the 50% Rule Applied to MFR?
I need a numbers guru to help me un-tangle some math fundamentals. I have a deal in process that I can still walk away from and I'm hoping someone can help me validate whether this is a reasonable or unreasonable purchase. I'll give you the background and numbers first, then follow up with a couple specific questions.
Property details:
-- Duplex, in short sale status from probate (owner died without having his legal affairs in order so his estate didn't make the payments). Currently has a tenant on one side and the owner's side was just remodeled, so it's move-in ready. This led to a mild bidding war.
-- I am using my veteran's VA mortgage guaranty to buy it so I'll live on the remodeled side and pocket the other side's rent. Agreed price was $160k plus I took the closing costs, plus I have to pay a VA funding fee (about 2.3%) Total financed is about $168k with NOTHING out of pocket. This price is about in line with comps so I'm basically paying retail, but it's tougher than expected in my local market to find a motivated seller with a move-in ready duplex where one side is available (per VA guidelines I'm required to personally occupy the property)
-- Gross rent equivalent = $1,700 -- but for now I'll only be able to collect $800 from the renter's side. I'll be factoring in my portion of the rent for the sake of our math. In a couple years I will purchase a single family home for us to live in, then rent out both halves.
-- PITI expected total is $1,094 monthly (Mortgage + interest $781, property taxes $220, insurance $93)
-- Deferred maintenance estimated $8k total (non-urgent items like flooring, paint, kitchen cabinets) of which I have the skills and tools to do much of it.
The questions:
1. The 'magic 50% rule' postulates that half of gross rent will be spent on maintenance issues averaged out over a period of time. Specifically, what then is the cash flow measured against -- PITI or PI or just P? Calculating against P and PI gives me cash flow, but PITI puts me in the red. I'm not happy about how close this deal is to the break-even point so I want to make sure I'm not wandering through a minefield; I earned the VA benefit that way and I'm not interested in doing it again.
2. I plan to use a property management service since I don't want him harassing my wife about unclogging his toilet after dinner. Do I factor management into the 50% rule or is their fee above and beyond?
3. Is the conventional wisdom to plan separately for Capital Expenditures and General Maintenance, or are they both included in the 50% rule? Perhaps the more precise question here is, What exactly does the 50% rule account for?
4. What do you make of this deal? Is it a financial bombshell or can I proceed with some confidence? I know I'm not going to make a killing on this one but if it's a viable deal, then it's at least a start. I've been trying to nail this first deal for almost a year now. If nothing else I can slowly build a modest cash reserve and use equity to make a better deal with more speed and flexibility -- but it all hinges on this first one.
Thanks in advance for your guidance. The BiggerPockets community is great and I appreciate you all.