Is the 50% Rule a reasonable rental forecasting measure in West Allis/Milwaukee with high RE Taxes?

8 Replies

After re-reviewing past income statements and doing my budget forecasting for the year I was thrilled to see I hit 38% expenses against my 2014 Gross Income on one of my rentals. But after some research on getting a better handle on expense forecasting, I realized I was not counting PM costs since I manage it and I was setting aside the cash but not specifically saving it into a side account for future Capex.

If I am being conservative for an area 2015 estimate, I have following for a east side West Allis SFH 3/1 1200+ rental:

Gross Income: $1095/mo rent, 4.2% Vacancy Loss (1 out of 24 months) = $12,593/year

Expenses: $3,200 Tax, $560 Insur, 5% Opex ($600), 10%Capex($1200), 10% PM ($1259), $175/quarter Water Bill ($700), and Admin/Advertise ($75) = $7,595/year

Net Income: $6,398/year and this puts the Expenses as a % of Gross Income at 61.4%

Now this rent seems to be in the middle range, maybe could be a little bit higher. Also, maybe the tenant could pay part of the Water bill. But I could also analyze the Opex/Capex further and potentially move it up a bit also. If Property Taxes was half this amount like in other states, it hits the ~50% range.

How do other property investors in Milwaukee County analyze this 50% rule and what do they realistically think they can get per year (or annually over a 5 year run)?

The water bill issue is a slam dunk item.  If your current rent is market including the water aspect, you could always lower the rent a little and have the tenant pay the water bill.  That removes some variable expense from your shoulders.

@Darren Budahn & @Dawn A. , this makes good sense for a SFH, I like the incentive for the tenant to manage their own consumption.

Regardless though, if I reduce rent and the water bill is paid by the tenant, it should really be a wash over time in regards to Expenses as a % of Gross Income.

Reworked the numbers for my example:

Gross Income: $1035/mo rent, 4.2% Vacancy Loss (1 out of 24 months) = $11,902/year

Expenses: $3,200 Tax, $560 Insur, 5% Opex ($595), 10% Capex($1190), 10% PM ($1190), Water Bill (Tenant), and Admin/Advertise ($75) = $6,811/year

Net Income: $5,266/year and this puts the Expenses as a % of Gross Income at 57.2%

Still am over the 50% rule though, my only other variable seems to be to pin down Opex/Capex harder (which I would do regardless), but is it unrealistic to regularly forecast 50% for SFH in West Allis/Milwaukee area? At $1,335/mo, this all evens itself out, but it is a little rich for eastside of West Allis.

For whatever is worth right around 60 % is what I come up with for my duplexes in West Allis and Milwaukee... Taxes are a big contributor to that and age of buildings causes higher maintenance as well. 60-65 % is normal including property management. If you had a bang up year great ! Put some away for the expense around the corner :)

Thanks for the feedback everyone, much appreciated! This has definitely added some value by improving my process to quickly estimate expenses on new rental offers as well further eliminate the variability of my water bill!

Just looked at another one today with an estimated NOI for about $4k from a $1050rent, now if I can just get the purchase price accepted at a cap rate closer to 10%...... The hunt for good investment continues! Feel free to send over any West Allis area deals!

West Allis is having a nice 1st quarter in 2015 according to GMAR 

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