50% rule = 70% rule for me?

Question

I live in south Florida and would like to build a portfolio of rentals down here before venturing out of state so I can have experience with the business before trying to do it absentee.
While trying to tweak the 50% rule for my area (taxes and insurance are higher) I noticed how hard it will be to meet.  Please check my math.

Taxes =2% of appraised value
Insurance on the safe side is 2% of replacement cost

Typical 3/2/garage in Broward and Palm Beach counties in a working class neighborhood will safely fetch $1500 now, maybe lower soon. The market value currently is $200,000+ and dropping.  The county assesed value would be about $170,000.  Lets say replacement value is $150,000

This puts taxes at 19% of rent and insurance at 16.6%.  Plus the standard of 8% for vacancy and 8% for managment gives me 51.6%.  I know maitainence should be 10% plus legal fees and south Florida seems to need a 70% rule.  Leaving $61000 at 8% intrest to purchase and fix up the house.  $47,000 if I want $100 cash flow.

I am starting to think SFR in my area are not the way to go unless you stumble on the sweet deal.

I woul dlike to have someone break down their 50% rule for the precentage that they pay for tax, insurance, maintainence, legal, blah blah blah.  MikeOH, what is your break down?

Thanks you all,
Zach

Jon Holdman · Answer

I don't really know.  In some sense, the taxes, whatever they are locally, should already be factored into the rule because it affects all housing.  But it sure seems to me like higher taxes will drive that percentage higher.

Fred Shandler · Answer

Wheatie, one of the ideas I still have a tough time with (as it relates to the 50% rule) is how to adjust projected operating expenses for high property taxes.

For example, there is a two family house that rents out for 1k p/m, total (12k p/y).  According to the 50% rule, taxes should be around $1,200 p/y.  Taxes are actually $1,800.  So, does that mean that I would need to take the $600 difference of actual ($1,800) and projected ($1,200) and factor that as an additional $50 p/m?

Thanks!
Fred

Zachary Wolz · Answer

Thank you for that reply.  Seeing your tax and insusurance rates makes it more believable as to why I cannot get it to add up.  I am aware of $200K being retail but it does accurately reflect the tax amout I will pay and gets me close on the insurance.  I think I will have to buy lower in the $60K range to make it work.  I know I want to build my net worth for the future but I can't live by the skin of my teeth like my current landlord is.  My rent doesn't even get close to the mortgage+tax+insurance.  Everything that breaks comes right out of his pocket including the AC last year.
Zach

Jon Holdman · Answer

Here's how I break down the 50% for my area:

10% - property management
10% - maintenance
12% - taxes and insurance
6% - vacancy
12% - everything else

Taxes and insurance are pretty firm numbers, so I know that's accurate.  Property management would be firm if I was paying it.  The others are really just guesses.  Its really impossible to break these out because some are so variable.

Your taxes and insurance work out to $533/month.  That's 36% for those two vs. 12% for here.  So, I'd say you're about right with the 70% rule.  Maybe 75%.

However, when you talk about $200K, that's retail.  You cannot make this work paying retail.  You have to find "sweet deals".  As I understand, your market, well, sucks.  You say its falling.   Pay $80-100K and this isn't such a bad deal.  Still not great, though.  Your taxes and insurance are just killers.