Does 50% rule apply in Texas with the High Property Taxes?

Question

Texas Investors, I have a question.  On your rental property, is the 50% rule accurate?

Will Barnard · Answer

Bill, the 50% rule (better described as a "guideline") is just that, a guideline and not a hrad fast rule. As such, every investment is different. Area, size, price, demographics, job market, local economy, tax rates, insuarcne rates, labor costs, material costs, etc. can all have a factor in any one single investment.

That said, the rule is said that if you had many units over a long period of time, regarless of area or any other issues, you would likely "average" close to 50% in expenses.

It is true that property taxes are higher in TX, but if you are a TX resident, you save on not paying state income tax. You also likely get cheaper labor, pay much less for the dirt, and make up for the higher taxes in many other areas. All in all, it averages out. In other locations, they may have low property taxes, but higher costs for other things.

So, to answer your question, yes, the rule would apply anywhere in the US.

Jon Klaus · Answer

Yes, generally.  While property taxes are higher, we can have lower expenses in other areas, like labor for example.

Mitch Stephen · Answer

I think the 50% rule is good enough. I invest in Texas.

Bryan Hancock · Answer

The 50% rule OF THUMB works pretty much everywhere because it is just a rule of thumb.  No more...no less.

Will Barnard · Answer

Jon K. busting out the videos for BP. What a great idea, several of us should be making some videos like this that link back to Biggerpockets. It gets both parties exposure and they can be shared on facebook, Linkedin, etc.

Nicely done Jon and thanks for the idea. Perhaps Josh and company can spread the word regarding this idea.

Jon Klaus · Answer

More, much more:

http://www.biggerpockets.com/forums/52/topics/17612-where-does-the-5-rule-come-from-

Jon Klaus · Answer

Bryan, here is a brief video summary about the 50% rule of thumb:

http://www.youtube.com/watch?v=UxhWvR76iak

There is  also much written about it in the forums over the past 2-3 years.

Bryan Scott · Answer

Someone will have to assist my understanding of the 50% rule?  I've been a fix-n-flip investor and a long-term, buy-n-hold landlord, but must admit, have never hear of the 50% rule?  Not including the rehab assumptions and expenses for long-term holds, I can verify, first-hand, the typical HUD assumptions for maintenance and vacancy expenses as being 16% - 17% per year (based on annual rents received).  And, I understand that I must remodel kitchens and bathrooms every 10 - 15 years, plus, I must replace the roof every 20-30 years and repaint exterior every 4-5 years and repaint interior every tenant turnover, or maybe (on average) every 2-3 years.  Carpet every 3-5 years (kids, pets, etc.).  Pls help me understand how the 50% rule applies to the above knowns.  I would be interested in using this "short-cut" in my pro-formas.  Thx in advance.

Will Barnard · Answer

Anthony, that may be true in your hypothetical, but remember, only two renatls is not enough for the 50% average rule. Again, it is used for those who will have mutiple units over a long period of time. Ceratainly in your example of just the two, you would likely have higher costs on the TX due to the taxes.

Anthony C · Answer

I am also in a high prop. tax area and in my analyses I find you have to have some flexibility on the 50% rule.

Granted I don't have any properties longer than 3yrs but when i'm searching for new I think of it this way...  Compare two $100k houses with property taxes of $3k and $7k.  House1 with the 3k is in midwest, House2 $7k in NJ..  You have a $4k difference in property taxes, does that mean that House2 will also have $2k (50%) more in expenses?  Labor may be a bit higher in the higher prop tax area but not that much...  so you must not be too strict on it when dealing with the extremes such as this

Does 50% rule apply in Texas with the High Property Taxes?

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