Ft. Worth, TX · Member since 2008 · 97 posts · 16 votes
I know the "50% rule" is bandied about as gospel here in the forums, but haven't seen any actual, hard data that says that operating expenses tend to be ~50% of gross rent income. I'd like to verify this number is, in fact, accurate. (I believe that it probably is; but I owe it to myself to verify my assumptions, right?)
It would not only help me ensure that I'm using realistic numbers, I also think that it would be good data (ammunition?) to have when negotiating.
Can anyone provide links to studies that address operating expenses as a percentage of gross rent income? The little searching I've done hasn't yielded anything.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y
NogginBoink,
When I first started in the rental business, I read all the "guru" nonsense books. By the time I was in business a year, I had probably read 30-40 books and had seen many "gurus" talk. Most of the "gurus" never mention expenses because they are trying to upsell the "student" to a more expensive course, bootcamp, or training. Of the gurus that did mention expenses, several talked about taxes and insurance. Others talked about taxes, insurance, management and maintenance. At the one year point, I had about 10 rentals and had been very lucky. I hadn't had a single vacancy or any other irregular expense, such as evictions, court costs, damage done by tenants (in excess of the deposit), etc. I felt like a GENIUS! I thought that I had found a business that simply made money hand over fist!!!
Unfortunately, that was short lived. As my portfolio continued to grow, I had a vacancy. Then an eviction. Then damage done by a tenant. Then a drug bust. Etc, etc, etc. In other words, I began to experience the REALITY of the business, which was quite a bit different than the silly guru hype. I began to fell more like an IDIOT than a genius. Shouldn't I have known that tenants get evicted? Shouldn't I have known that there would be vacancies? Shouldn't I have known that tenants would damage my property? The answer was YES, I should have known, but instead I had chosen to be ignorant and believe the nonsense that I read in the dozens of guru nonsense books!!!
I knew that there had to be an answer out there. I started looking at all the apartment and rental housing data I could find. This data included hundreds of thousands of rental units throughout the United States. What I found out is that throughout the United States, operating expenses run 45% to 50% of the gross rents. That's where my "50% Rule" came from.
The only thing that saved me from joining the majority of other newbies that fail is that I'm extremely competitive. After I bought one of my first houses, I heard of another investor that bought a house for the unbelievable price of $20,000. I knew that if that investor could do it, so could I. My competitive fangs came out and I was on the search for properties at a HUGE DISCOUNT. So, even though I didn't understand the operating expense issues at this early point, my competitiveness saved the day.
I've been preaching the "50% Rule" every since, mainly because I was so frustrated that the gurus were either lying about the expenses or didn't understand them. That's how the "50% Rule" came to be.
BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votes
18y
Please note everyone that I split a large chunk of this discussion off into the off-topic area, as it was just a back and forth discussion between 2 members that had nothing to do with the 50% rule . . .
Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
17y
Detroit and Flint....
You can buy some nice properties in those areas in the $10k range or so.
I've also seen quite a bit in the Dayton OH area as well (Which i'd much prefer over Flint or Detroit)
How about southern Ohio...Plenty of singlewide trailers on a acre in the $5k or so range.
As for the 50% rule, it seems that too many people are getting really bent out of shape by it.
From my understanding, the 50% is a rule of thumb and not a rule set in stone. Sure, you can get away with a little less , but the goal is definately to try and not to.
I think we should Fly Mike out to CA ,and Nationwide out here to the Columbus area.......I bet both would do pretty well if we transplanted them, not that I'm trying to get rid of mike or anything.
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
17y
Originally posted by **********:
Yo Brandon! Can't send Mike out to CA as he is Homo Phobic AND carries a GUN!
A BAD combination!
JUST Kidding dude!
Phobic denotes a fear. I hardly think it's Harley riding, armed citizen Mike who's afraid of west coast folk regardless of their orientation. My concern is that they could be Mikeophobic. :wink:
Real Estate Investor · Goose Creek, SC · Member since 2008 · 34 posts · 0 votes
17y
Way I see it more NOI the better, the reason why most newbie landlors fail i sbecause they treat it more like an allowance instead of a buisness. I only plan to use a small amount of it, the rest has to stay because what if all your tenenat move out, what if half the building burns down? Vandalism, etc. You have to be prepared for anything.
Residential Real Estate Broker · Grand Blanc, MI · Member since 2008 · 885 posts · 316 votes
17y
Originally posted by Brandon Schlichter:
Detroit and Flint....
You can buy some nice properties in those areas in the $10k range or so.
Yes, that's right. Two of my properties are in the City of Flint. I'm actively in the process of searching for more. There's PLENTY of cash flow opportunities in Flint. Rents in the southern Flint area are ~$600 a month. Work the numbers backwards and you'll see why the investors are grabbing all the $10K - $15K deals...
Mike OH wrote: After I bought one of my first houses, I heard of another investor that bought a house for the unbelievable price of $20,000. I knew that if that investor could do it, so could I. My competitive fangs came out and I was on the search for properties at a HUGE DISCOUNT.
Maybe you've discussed this elsewhere, Mike, but if not, would you consider starting a thread to discuss how you find hugely discounted deals?
(I think the poster is right about Dayton. Geez...they're practically giving houses away there.)
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
Mike has answered this question numerous times. The short answer is: personal contacts. Get out of the house, talk to lots of people, prove you can really buy and really close and deals will come to you. Looks back through some of his posts and you'll get a more detailed answer.
I don't know if Mike invented, through his experience, the 50% rule, but Moody's agrees with him (or he agrees with them).
CMBS Moody's Approach to Rating Loans Secured by Multi-Family Properties
Pertinent portion:
The national average vacancy rate for all years since 1980 is 7.3%. Job growth and household formation are the primary drivers of the multi-family market demand. Apartment property sector demand can be threatened by a booming market in single-family-home sales spurred by low interest rates, weak demand for apartments due to a struggling economy and job losses; and overbuilding. [...]
Moody's objective for determining net-cash flow is to ascertain the most likely sustainable level over the term of the debt. The Moody's analyst reviews the underwriter's projections of revenues, expenses, leasing costs, and capital expenditures. The analyst then makes adjustments to the extent necessary for these items based on current market levels, historical performance, Moody's guidelines, and the analyst's judgment. The typical contents of the underwriter's information package are listed in Appendix B. [...]
Expenses
Moody's evaluates the underwritten expense levels by reviewing them against historical performance for the building, our own experience, appraiser's estimates, and industry norms. Multi-family properties are leased on a gross basis, with the owner paying operating expenses. Overall operating expenses are typically between 35% and 50% of the effective gross income. Hi-rise buildings will have significant elevator expense, while garden apartment projects would have higher landscaping costs. Our approach to various expense categories is as follows:
Riverside, CA · Member since 2008 · 49 posts · 2 votes
17y
Originally posted by Caitlyn Coyle:
Mike OH wrote: After I bought one of my first houses, I heard of another investor that bought a house for the unbelievable price of $20,000. I knew that if that investor could do it, so could I. My competitive fangs came out and I was on the search for properties at a HUGE DISCOUNT.
Maybe you've discussed this elsewhere, Mike, but if not, would you consider starting a thread to discuss how you find hugely discounted deals?
(I think the poster is right about Dayton. Geez...they're practically giving houses away there.)
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y
Please don't say that Moody's agrees with me (or vice versa)! They are still rating the US government debt as AAA!!! UGH! Even I know better than that!
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y
I think Moodys is using 35% on the low end because they aren't including all the expenses. I noticed that capital expenses (not technically an operating expense) are missing. That brings it up to about 40% with just that one addition.
Real Estate Consultant · Member since 2008 · 792 posts · 30 votes
17y
I think most would agree that they both fall in the 35-50% range....leaning WAY toward 50%. I think Moodys is using 35% on the low end because they aren't including all the expenses. I noticed that capital expenses (not technically an operating expense) are missing. That brings it up to about 40% with just that one addition.
Mike
Agreed. My simple point was that I don't think the percentage differs much at all from SFR to multi-family.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
What are you basing that Opinion on? Do you have enough experience in both to make that judgement?
Actually, if you read the entire doc, it goes over capital expenses at least twice during the article so they are including it. Either way 35%-50% is a huge range. I would not want to base my decision to purchase on others estimates anyways. I will do my own homework.
David Wrote:
I disagree. What is so dramatically different about multi-family expenses than SFR expenses?
What is so dramatically different about the PGI and the EGI of each?
If they are so different, which has higher expenses....SFR or MF?
I have already explained this before. It is MY experience that SFR's and duplex units have lower OE ratio's than do commercial multifamily units (5 units+). I have listed before many of the reasons for that conclusion in MY experiences.
Of course, I have also stated in other threads that OE ratios can dramatically change depending on the current vacancy rates and the income level of the per unit. In other words, if your rents are $300-$600 monthly per door, you are obviously going to have a higher OE ratio than if you have $800+ per door rental incomes.
Jon Holdman has also eluded to this fact on several occasions.
MikeOH wrote: They are still rating the US government debt as AAA!!!
That's because Treasuries are still AAA. They're backed by the full faith and credit of the United States--even if the Treasury must print more money to back 'em!