Investor · Newnan, GA · Member since 2020 · 1 post · 0 votes
My grandfather is an old school investor all his rentals are paid for. He always said that 2 months should pay for taxes insurance repairs for the year and 10 months should be profit. Is this a real thing has anybody ever heard of that and does it make any financial logic.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y
The only 10-2 principal I am familiar with is that a full time investor should never start work before 10 am or work past 2 pm, haha. Thanks for sharing your grandfathers principal. For paid off rental properties, this basically means 16% of total income should go towards expenses. That is also known as 16% expense ratio. As others mentioned, the 50% rule is assumes a 50% expense ratio. For my business, 50% expenses is fairly high but 16% would be low. It is also worth mentioning that your grandfather may not be including vacancy, management and CAPEX in his numbers. He is probably self managing and vacancy/CAPEX are not regular "hard" expenses, so they are often overlooked.
Can you share any other wisdom that your grandfather has to offer? I love hearing new (old) perspectives.
Investor · US · Member since 2017 · 71 posts · 80 votes
5y
Never heard of it. What I’ve heard here is 50% rule. It includes more expenses than the 10-2 such as vacancy and setting aside for capital expenses. The 10-2 might hold up for a few years but not when the HVAC needs to be replaced or when there’s a nasty eviction. 50% rule is more conservative to set expectations for covering those expenses.
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
5y
@Zach Clark I wish I could say I am familiar with the 10-2 principal and use it all the time. But that is not the case more like 5-7 for me. Kudos to your Grandpa!
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
5y
Even buying 2% multis at a 14 cap back in 2003, my break even ratio was 6/9 or 9/12 with debt. I suppose without debt it wouldve been 4/9. But 2003, off-market, motivated seller.
For houses my expenses excluding debt or cap ex run about 36% self-managed, 50% with a PM.
Equity capture at the buy is the play these days. The lunch money cash flow isn't worth the work.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y
The only 10-2 principal I am familiar with is that a full time investor should never start work before 10 am or work past 2 pm, haha. Thanks for sharing your grandfathers principal. For paid off rental properties, this basically means 16% of total income should go towards expenses. That is also known as 16% expense ratio. As others mentioned, the 50% rule is assumes a 50% expense ratio. For my business, 50% expenses is fairly high but 16% would be low. It is also worth mentioning that your grandfather may not be including vacancy, management and CAPEX in his numbers. He is probably self managing and vacancy/CAPEX are not regular "hard" expenses, so they are often overlooked.
Can you share any other wisdom that your grandfather has to offer? I love hearing new (old) perspectives.
Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes
5y
Good for your grandpa. I have not heard of it but fully support and @Joe Splitrock take.
Unfortunately property taxes have risen to a point I am not sure that is possible. I mean, I am sure it is possible somewhere on the right deal but buying today and having 16% expenses seems incredibly low. Good on him!