50 percent rule

[Adrian Zamora]

Hello BP

I have a question about the 50 Percent rule. I was wondering how to justify more expenses just because there is more rent. For example lets say I have a property that rents for $500 and according to rule $250 will go to cost, if I decide to raise the rent to $600 now the cost is $300. If everything stays the same why should I factor in more cost for a simple rent increase; shouldn't that just make your profits go up? Thanks in advance.

[J Scott]

Originally posted by @Adrian Zamora:

For example lets say I have a property that rents for $500 and according to rule $250 will go to cost, if I decide to raise the rent to $600...

That's your problem right there...you don't *decide* to raise the rent. The 50% rule is generally based on market rent, and market rent is determined by the market, not by the landlord. Typically, the higher the market rent, the higher the expenses -- this includes taxes, insurance, property management, etc.

There's no rule that says expenses *have* scale with rents, but they often do. This is because property values tend to scale with rents (otherwise cap rates get out of whack). And property values tend to influence many of the expenses associated with your property.