50% rule

Property Manager · New Orleans, LA · Member since 2013 · 184 posts · 34 votes

Hey guys!! Rookie question here. Can someone give me a breakdown of the 50% rule using this example? I have already calculated it myself, I just want to be sure I am doing it correctly.

Purchase price- $75k

Rehab cost- $10- 15k.

Taxes and insurance- $300 month

Minimum potential rent- $1100-$1300

Other info:

New roof, new a/c, ARV $125k - $130k

Any insight on the 50% rule or 2% rule will be appreciated.

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J ScottPro Member

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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

13y

Quick video tutorial of the 50% Rule:

The 50% Rule - Video Tutorial

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Michael Baradell thats an excellent deal and flip.. profit is great, time to do it very good.. can you find those kind of deals with any regularity? most markets 25k profit deal with 100k in is ultra competitive.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Chris Hougland you got it right those are the numbers and return in buy and hold in hot markets is 6 to 8% if one is using real numbers and being honest with one's self.. when you look at TK companies cost are usually missing or understated.
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Michael BaradellBusiness Member
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Property Manager · New Orleans, LA · Member since 2013 · 184 posts · 34 votes
12y
@Daniel Ryu thanks. For me, being able to compare my deal and numbers with other posters on here has helped me a ton.

@Jay Hinrichs these types of deals are extremely competitive in my market as well. I am not a cash buyer at this point, so since I require financing, I do miss out on quite a few deals. Being a realtor however gives me a slight advantage as I can submit an offer pretty much immediately when a property is listed. That is the only reason I was able to get my first property. It was a succession sale that came available Sunday morning. I viewed it around lunch time and had a contract on it by 3 pm. There were 4 back up offers that came through on Monday. I just picked up a Home Path property on Friday. Here are my numbers on that deal:

Purchase price- $74,000. It was listed at $99,900 for a month and then reduced to $79,900 which is when I submitted an offer.

Seller is paying $1,500 towards closing.

Rehab budget- $32,000 ( hoping to come in under $30,000 ). I am estimating a total roof replacement but I haven't gotten final word from my roofer that it will require a total replacement.

ARV is set at $130,000 but that is fairly conservative. I will list at $139,000.

My " worst case scenario " puts me all in around $114,000 with all fees, and holding costs.

Minimum profit should be close to $14,000 (before taxes) selling at $130,000.

Not a home run but its 3 mins from my house, I can rent it in less than 30 days for $1,300, and because of the type of financing I am getting, I will have less than $5,000 of my money in the deal.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Michael Baradell

nothing wrong with 300% return on your capital. at least your realistic on your returns and are keeping the ball rolling. Were is your town located?
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Michael BaradellBusiness Member
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Property Manager · New Orleans, LA · Member since 2013 · 184 posts · 34 votes
12y
@Jay Hinrichs My focus cities are Mandeville, Covington and Slidell. All are about 30 mins north of New Orleans. Most of the big dogs focus in New Orleans which is really hot right now. I am starting to research the New Orleans area now with hopes of investing there in the near future.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Michael Baradell

landed at the Slidell airport once...keep up the good work
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Amanda Naus
Flipper/Rehabber · Ormond Beach FL · Member since 2015 · 1 post · 1 vote
11y
Originally posted by @Bill Gulley:

Yep, that a good one!
Well, now that I understand that expenses will be half my gross rents, it just makes sense then, to reduce my expenses just reduce the rents! :)
I really like that kind of fiscal thinking. As soon as I buy a property to hold, I will keep my rents low in order to keep expenses down.
Anyway - thanks! I'm always grateful for a good chuckle.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
11y
Originally posted by @Account Closed:
Sorry to rain on anyones parade but these rules of thumb are very dangerous...
....
Lastly, while the 50% ... rule might be ideal targets...
The 50% rule is not a target. It's an approximation of a statistical average.
Using rules of thumb for a first pass analysis is never dangerous. The purpose of rules of thumb as a first pass analysis is to allow investors to rule out bad investment candidates quickly; the purpose is NOT to make a decision to move forward on an investment.
If someone is using a rule of thumb to make final investment decisions, the problem is with the person investing, not the rule of thumb.
And if someone is not using rules of thumb to quickly weed out obviously bad investments early on, they are wasting a lot of time. If I told you I had a buy-and-hold deal to sell you -- the purchase price was $600,000 and it generated $300 per month in rental income -- how long would it take you to rule this out as a good rental candidate? Would you need to sit down and do a formal analysis to rule it out? Or could it do it in about 3 seconds using basic rules of thumb you likely already have in your head?
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
Originally posted by @J Scott:

Originally posted by @Account Closed:

Sorry to rain on anyones parade but these rules of thumb are very dangerous...
....
Lastly, while the 50% ... rule might be ideal targets...
The 50% rule is not a target. It's an approximation of a statistical average.
Using rules of thumb for a first pass analysis is never dangerous. The purpose of rules of thumb as a first pass analysis is to allow investors to rule out bad investment candidates quickly; the purpose is NOT to make a decision to move forward on an investment.
If someone is using a rule of thumb to make final investment decisions, the problem is with the person investing, not the rule of thumb.
And if someone is not using rules of thumb to quickly weed out obviously bad investments early on, they are wasting a lot of time. If I told you I had a buy-and-hold deal to sell you -- the purchase price was $600,000 and it generated $300 per month in rental income -- how long would it take you to rule this out as a good rental candidate? Would you need to sit down and do a formal analysis to rule it out? Or could it do it in about 3 seconds using basic rules of thumb you likely already have in your head?
OK I'll bite. $600,000 purchase price. What rule of thumb are you using and what conclusion has been reached?
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
11y
Originally posted by @Account Closed:

OK I'll bite. $600,000 purchase price. What rule of thumb are you using and what conclusion has been reached?
Bob - I've given up trying to educate you. Lack of response from anyone else seems to indicate (to me, at least) that others understand. That was my goal. Have a great day!
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
Originally posted by @J Scott:

Originally posted by @Account Closed:
OK I'll bite. $600,000 purchase price. What rule of thumb are you using and what conclusion has been reached?
Bob - I've given up trying to educate you. Lack of response from anyone else seems to indicate (to me, at least) that others understand. That was my goal. Have a great day!
J not asking for an education. You make statements that you can't explain or support. I'm hoping people can learn from your mistakes. I've had great response from people that have a much better grasp of cap rates and leverage from showing your misconceptions of these two common real estate concepts.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
11y
Originally posted by @Account Closed:

Originally posted by @J Scott:
J not asking for an education. You make statements that you can't explain or support. I'm hoping people can learn from your mistakes. I've had great response from people that have a much better grasp of cap rates and leverage from showing your misconceptions of these two common real estate concepts.
Bob - I was recently asked by someone about the thread where you argued the wrong definition of "cash flow" for three pages with some of the smartest people on this site. Everyone in the thread agreed you were incorrect, but you kept arguing for days.
The person I was talking to asked me, "Why do you bother even arguing with him -- everyone else has learned to just ignore him?"
He made a great point, and I've decided that I'm going to join the rest of the smart people on this site and just ignore you.
Again, have a wonderful day.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
Originally posted by @J Scott:

Originally posted by @Account Closed:
Originally posted by @J Scott:
J not asking for an education. You make statements that you can't explain or support. I'm hoping people can learn from your mistakes. I've had great response from people that have a much better grasp of cap rates and leverage from showing your misconceptions of these two common real estate concepts.
Bob - I was recently asked by someone about the thread where you argued the wrong definition of "cash flow" for three pages with some of the smartest people on this site. Everyone in the thread agreed you were incorrect, but you kept arguing for days.
The person I was talking to asked me, "Why do you bother even arguing with him -- everyone else has learned to just ignore him?"
He made a great point, and I've decided that I'm going to join the rest of the smart people on this site and just ignore you.
Again, have a wonderful day.
I thought the question was pretty simple. What rule of thumb are you using and what conclusion has been reached? Do you not have an answer?
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Michael Seeker
Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
11y
Originally posted by @Account Closed:
What rule of thumb are you using and what conclusion has been reached?
Rule of thumb: posts by this person are inflammatory and have negative intentions not meant to help anybody.
Conclusion: ignore these posts to preserve sanity and prevent hours of wasted time/effort.
2 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
Originally posted by @Michael Seeker:

Originally posted by @Account Closed:
What rule of thumb are you using and what conclusion has been reached?
Rule of thumb: posts by this person are inflammatory and have negative intentions not meant to help anybody.
Conclusion: ignore these posts to preserve sanity and prevent hours of wasted time/effort.
Still upset that you got learned in this post? http://www.biggerpockets.com/forums/522/topics/196...
Rent-Piti x 12 = NOI. IGNORE at your own risk.
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