what is the 50% rule? what is the 2% rule both in the reports?

Question

what is the 50% rule? what is the 2% rule both in page 2 of the reports?

Omar Khan · Answer

lol... Don't think you'll be developing much of a long-term relationship by purposefully hiding stuff from investors.

As much as I like the BP calculators, experienced investors will not take you seriously if you're just running the #s off BP calculators.

Bill F. · Answer

Hold up for a second Ellen Mitchel. You want to omitted these calculations from the report, calculations that a fourth grader could in their head, but your bio says you want long term relationships with investors, hedge funds, CPAs, Attorneys..

Those two facts seem at odds with each other.

Wouldn't it be better to take an educational approach to working with your clients rather than hiding things from them? After all knowledge is power, right?

Lesley Resnick · Answer

Those guidelines are just that. Given the rise in market achieving those numbers has become more difficult. Both interest rates and prices keep rising.

Be cautions of ending up in spreadsheet paralysis. It is simpler to analyze than the sheets would leave you to believe. They also do not do a good job in calculating the depreciation and tax implications. Particularly in year one, when you pay points closing, etc.

I keep it simple:

What is the rent multiplier – price compared to rent as a percent. This is the big one when comparing two properties.

How much money is left after fixed expenses: financing, tax, insurance and any other fixed costs (trash, water, etc).

I do not include an estimate for: vacancy, maintenance, non fixed expenses.  If you always assume the same percentage then it is unnecessary.

There is no accounting entry for keeping reserves for future expenses like vacancy.  You can not count expenses you have actually incurred.

I may consider future expenses especially if I know I will have to replace the roof and A/C. The two largest replacement items. I keep reserves, but that is everything in my life, from a repair of my car a roof for a rental property.

Dustin Beam · Answer

If you're selling, IMO you should provide actual expenses.

Ellen Mitchel · Answer

Thank you, but what if I do not want to include that in my report to prospective buyer because the numbers are not favorable?

AJ Leman · Answer

Hi Ellen,

Welcome to BP!  These rules (and others) are essentially 'back of the napkin' calculations that are performed to gauge income and expenses of rental property.  The 50% rule states that if you rent a property for $1000/month, you can expect $500/month in vacancy and expenses (not including your mortgage payments). The 2% rule is a goal that folks shoot for. It means that you try and rent your property for 2% of the purchase price.  For example, if you buy a $100,000 property, you would try to get $2,000/month in rent, or 2% of the purchase rice.

Here is an article that will quickly give the basics of the 50% rule and the 2% rule: BP Article

BP has lots of good stuff on all kinds of metrics and their search engine is pretty good.

Good luck!

what is the 50% rule? what is the 2% rule both in the reports?

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