50% rule in New Brunswick (Canada)?

4 Replies

Hello, BP newbie here.  

I was watching this video by Brandon recently and found the method interesting for helping to identify properties that might be worth a second look (https://www.biggerpockets.com/renewsblog/2013/04/09/how-to-buy-a-small-multifamily-property/).  

However, he talks about a "50% rule" meaning that you can roughly estimate that 50% of rental income will go to expenses and the remainder is left to pay the mortgage and generate cash flow. 

For those of you investing in New Brunswick (Canada, not New Jersey) do any of you find this useful for your initial analyses?  In New Brunswick, where we pay double property tax for non-owner-occupied properties, is the 50% rule a good estimate?  

(Recognizing, of course, that it's just a rule of thumb!) 

Thanks

I think you said it best yourself, it's a rule of thumb. Exact figures are always better, those quick convenient ratios are a good first step to decide if you want to dig further.

Taxes, Mortgage Payment, Rent, are all easy things to project. I'd imagine you'll break down the costs on any deal you we're serious about. So if NB charges double for non-owner-occupied (which is ridiculous I might add :p) Maybe bump the ratio to 60-70%.

@Hannah Westner

@Jacob Perez nailed it on the head. I always use the 50% rule for initial analyses, but I base the percentage on the market area. For a city / state that has higher taxes, I'll up the percentage of expenses to 60%. For lower tax areas and newer properties, I'll use a 45%

Maintenance, CapEx, vacancies, and taxes are the major contributors that will increase or decrease the percentage for initial calculations. The age of the property, the vacancy rates, and the tax rates are what I usually look at to adjust.

Stay conservative, and aim for 65% or 70% for your analyses (assume an extra 10-15% expense)

@Hannah Westner

The idea that operating expenses should fall into the range of 40% - 60% of gross revenue allows you to quickly triage properties which are presented to you.   Properties which fall outside this range are not necessarily amazing deals (if <40%) or dead weight (if >60%), but properties whose operating expenses are 70 - 80% of revenues are unlikely to be "deals".

Regardless of how useful you find the 50%(ish) rule of thumb, you should always conduct a detailed analysis before offering to spend your money.

A {contrary} observations to the above two posts: neither CAPEx or mortgage payments are operating expenses.

BTW:  Property taxes are not "double" on residential rental properties in NB.  Technically, the difference is that owner-occupied properties receive a rebate of the provincial portion of the property taxes assessed and only pay the municipal portion.

Thanks for all the responses.  This is what my gut was telling me; great to have that confirmed.  

Yes, @Jacob Perez , I would definitely be using real numbers if we find something we are serious about.  The video that I watched was talking about how to do a "quick" analysis to decide whether or not to look further.  

@Ben Wilkins , that's what I was thinking I should do - just use a higher % for the rough calculation.  

@Roy N. , thanks for the explanation about "double" taxes in NB.  Very helpful insight.