Is 50% Rule (Guideline) still relevant in your market

14 Replies

Hi Everyone....Tax season is great to reflect and really dig into your numbers!  I have found that my expenses are creeping up year on year and revenues remain relatively flat.  Atlanta Market

Property taxes have doubled for me over past 2 years so I think this is primary cause.   I am now considering 60% as a guideline not 50% when evaluating properties.

Thoughts?

No company avatar mediumRobert M. MBA, RSM Holdings LLC | [email protected]

Sadly, my only thought is that is February and you are done with your taxes.  I need to be more organized.

It unfortunately does not work for my area. I instead look at the cash on cash return as that is my most important number and measure! 

I am finding with the increasing cost of house prices this is the best way to look at the actual cost of the house!

@Robert M. has it right. What matters is your ROI or cash on cash return--with respect to your risk tolerance.

@Elizabeth Colegrove and @Larry T.  Agree 100%, however for a very quick in my head calculation I will use it as a guideline.  I always recommend running a full set of numbers before making any offers.  I am now doing quick calculations using a higher rate when I get a lead on a property.  At the end of the day I guess I should have posted a post about expenses rising faster than rents in my area.  Seems to be driven primarily by property tax increases.  

@Heather W.  ...I wish my taxes were complete!  ....but I am working on my Pro Formas

No company avatar mediumRobert M. MBA, RSM Holdings LLC | [email protected]

The 50% rule is non-sense.  Every area has different levels of income and expenses.  You might get lucky if you use this tool and happen to live in an area with that matches but the odds are that you don't.

Some places rent for $2000 per month.  Other places rent for $500.  You could live in an area of high insurance and taxes or low insurance and taxes.

You could also own a property that has high turnover.  Or, you could be in an area that people rarely move from.  This all has an affect on expenses and needs to be factored in.

The 50% rule never made sense.

Originally posted by @Steve Olafson :

The 50% rule is non-sense.  Every area has different levels of income and expenses.  You might get lucky if you use this tool and happen to live in an area with that matches but the odds are that you don't.

Some places rent for $2000 per month.  Other places rent for $500.  You could live in an area of high insurance and taxes or low insurance and taxes.

You could also own a property that has high turnover.  Or, you could be in an area that people rarely move from.  This all has an affect on expenses and needs to be factored in.

The 50% rule never made sense.

 Sorry, that's just plain ignorant.

Places with low cost of living... low taxes, low insurance... guess what, they tend to have low rents.  Places with high cost of living... high taxes, high insurance... they have higher rents.

Beyond that, places that rent for higher amounts will have higher expenses... making a $2,000 a month place rent ready will cost a LOT more than a $500 a month place.  The finishes and condition of the property just need to be that much higher.

The 50% rule is a great guide... but yes, it needs to be tweaked up or down +/- 10% depending on the particulars of the property... I think that's what the OP is asking.  It's a pretty good starting point, he wants to know how people refine it.

As to Elizabeth's point... CoC has nothing to do with the 50% rule. The 50% rule is all about expenses. CoC is dependent on 4 things... 1) expenses, 2) GOI, 3) financial terms, and 4) amount of cash into the project (down payment + rehab). She can focus on CoC all she wants, the OP was simply asking what % expenses she's currently showing on her taxes to see if the 50% rule is holding true in her area or how far it has drifted.

@Nathan Emmert  

I have bought over a thousand units in 3 different states.  I make it my business to know income and expenses.  I would not still be in the business if I was ignorant to this fact.

I bought one property in CA that the average resident stayed for 3 or more years.  It had very little turnover thus generated a low cost for make-ready expenses.  The rents were high as it was by the coast and had an ocean view.  My costs were less than 25% of the rents.

I had another property in Corpus Christi.  Rents were low but because it was in a hurricane zone, insurance was sky high.  Taxes in Texas are incredibly high as well.  Now this property was close to a school and military base.  The turnover was very high.  My expenses on this property were close to 70%.

I had yet another that was in Phoenix that was all utilities included.  Taxes and insurance were low but paying for electricity for the tenants with our a/c bills was out of control.  The expenses were over 60% here.

If I would have used the 50% rule on any of these, I would have either been screwed or not gotten the deal.

The 50% rule is a great guide... but yes, it needs to be tweaked up or down +/- 10% depending on the particulars of the property...

 If you have to tweak it plus or minus 10% then where is the value?

Originally posted by @Steve Olafson :

The 50% rule is a great guide... but yes, it needs to be tweaked up or down +/- 10% depending on the particulars of the property...

 If you have to tweak it plus or minus 10% then where is the value?

 The value is the unknown.

You cited examples of reality... very little of which you knew going in.  Did you know tenants would always stay 3 years and that you'd have very low vacancy for example?

Generally speaking, if you're looking at a property and it's showing expenses of 25%, the 50% guideline gives a new person a basis to believe that number probably isn't the full story.

There is no perfect, there is no way to know everything, this is just a nice, easy, straight forward starting point.

Originally posted by @Nathan Emmert :

Generally speaking, if you're looking at a property and it's showing expenses of 25%, the 50% guideline gives a new person a basis to believe that number probably isn't the full story.

There is no perfect, there is no way to know everything, this is just a nice, easy, straight forward starting point.

 How is this a good starting point?  Some random number?

I use a number for an area based on reality.  In Phoenix, I currently use $3300/unit/year as a starting point for expenses and adjust for variables.  I think that it is important that an investor should learn a bit about their particular market with respect to income and expenses and use this for a rule.

Originally posted by @Steve Olafson :
Originally posted by @Nathan Emmert:

Generally speaking, if you're looking at a property and it's showing expenses of 25%, the 50% guideline gives a new person a basis to believe that number probably isn't the full story.

There is no perfect, there is no way to know everything, this is just a nice, easy, straight forward starting point.

 How is this a good starting point?  Some random number?

I use a number for an area based on reality.  In Phoenix, I currently use $3300/unit/year as a starting point for expenses and adjust for variables.  I think that it is important that an investor should learn a bit about their particular market with respect to income and expenses and use this for a rule.

 Except it's not random... it's based on Government studies of rentals across the entire country.  There's nothing random about it, it's a statistically based number.

Good that the government knows how to balance a budget.  If they didn't, I would be afraid there data Is wrong.