Couple of questions on the 50% Rule

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Couple of questions on the 50% Rule

Cameron Marmon
Investor · Richardson, TX · Member since 2017 · 63 posts · 7 votes
Hey everyone, new guy here. Loving the forum and the info. I have a few questions in regards to the 50% Rule. I may be making a simple rule too complex, but curiosity is making me ask haha. Example: We identify a property and gross rev. is $2000/month. Subtract operating expenses of $1000 (50% of gross), then we have an NOI of $1000. Subtract the monthly mortgage payment of $500 and we are left with CF of $500/month. Questions: - Does the monthly mortgage payment consist of principal and interest only? - What is the goal return you all shoot for on a deal? - If the deal makes sense for you, what other rules/analysis would you all follow this up with? Thank you!
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Dan MackinBusiness Member
Real Estate Agent · Erie, CO · Member since 2014 · 1k+ posts · 512 votes
9y

1. Yes the monthly mortgage is just the P&I.

2. This is completely dependent upon your area. For instance here in CO a lot of folks who would reference the 1% or 2% rules aren't really reaching those numbers. We're only really getting .6%-.8% on most "deals".

3. Seeing the property :-). You figure out a baseline to figure out if it's worth your time to see a property. Then when you're onsite you figure out more realistic expenses. For instance is the furnace new or old, same with the roof. Those will change your Capex estimations.

720-466-3378
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  • Dan MackinBusiness Member
    Real Estate Agent · Erie, CO · Member since 2014 · 1k+ posts · 512 votes
    9y

    1. Yes the monthly mortgage is just the P&I.

    2. This is completely dependent upon your area. For instance here in CO a lot of folks who would reference the 1% or 2% rules aren't really reaching those numbers. We're only really getting .6%-.8% on most "deals".

    3. Seeing the property :-). You figure out a baseline to figure out if it's worth your time to see a property. Then when you're onsite you figure out more realistic expenses. For instance is the furnace new or old, same with the roof. Those will change your Capex estimations.

    720-466-3378
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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Cameron Marmon The 50% rule is just a first-blush calculation that people like to do.  It is by no means comprehensive.  In general, maintenance on a 2014 construction property will be lower than something built in 1920.  Not to mention that usually people use the 50% rule for "market gross rents".  If you delve into a D neighborhood you could find quite a difference between "projected rents" and "collected rents".  One of the mistakes that I think people make is automatically thinking a property is "a deal" just based on the 50% rule, 1% (or 2%) rule, etc.  Frankly, I'm not sure I'd want a 2% property as it likely needs some work on is in an area that I don't want to particularly own in.  That said the "rules" also change as @Dan Mackin noted.  You're going to have a hard time finding a 1% deal in Denver, San Francisco, etc.  People in those markets are banking on a certain amount of appreciation that investors in Cleveland or Detroit aren't.  You're in Texas, I'd imagine far more properties hit the 50% rule in San Antonio than in the heart of Austin.  Morale of the story, "rules" can vary by region and even location within a metropolitan area.

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  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    9y

    I have a 4/1 in c class neighborhood at 23325 Roger Dr. In Euclid. It rents at $925.00 or higher.  Selling for about $55,000.00.  Plus, it has appreciated about $20,000 or 65-70% appreciation in less than 2 years of ownership.  I am selling it right now.  Just listed last week. I have it listed at $55,000 and purchased it less than 2 years ago for about $30,000.  It will most likely sell for a little under $50,000 I would think.  That would still be close to the 2% rule for an investor.

    Message me if you want more info about how I have done in this area.  I even have a PM too if needed.  It is vacant and fixed up already.

    Swanny

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  • Jim BlackburnBusiness Member
    Lender · Florida Based (48 states Puerto Rico) · Member since 2017 · 321 posts · 121 votes
    9y
    I think anything over $100 positive cash flow is a good deal, especially if the property is located in a romantic location with lots of appreciation… You're benefiting from owning and controlling that asset, while your tenant is making the payment!
    954-993-1625
    Stairway Mortgage, a Division of NEXA Mortgage LLC597 Reviews
    WebsiteView Page
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  • Cameron Marmon
    OP
    Investor · Richardson, TX · Member since 2017 · 63 posts · 7 votes
    9y

    Thanks for the replies guys!

    As you said, ACTUAL gross rents will obviously vary based on the area and other factors. However, the 1% rule is another calculation we can use to get an IDEA of what our gross monthly rent should be, correct?

    When calculating that, do you go off the purchase price, the purchase price plus estimated closing costs, or the mortgage amount after equity injection?

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  • Cameron Marmon
    OP
    Investor · Richardson, TX · Member since 2017 · 63 posts · 7 votes
    9y

    Ok, simpler question. Do we use the 1% rule to get an idea of what our GROSS monthly rent should be or NET monthly rent?

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  • Dan MackinBusiness Member
    Real Estate Agent · Erie, CO · Member since 2014 · 1k+ posts · 512 votes
    9y

    Gross purchase price. Only use these rules to know whether you should analyze a property or not. Just because something hits the 1% rule doesn't mean it will cashflow. 

    720-466-3378
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