What to include in 50% costs & can you charge double mortgage?

6 Replies

So I may be confused on the 50% rule because it just might not work for mid-priced properties in the Las Vegas market or I might be misunderstanding the concept. For example, mortgage/HOA/insurance/taxes on an average mid range house in a B neighborhood are likely to run 1000 to 1800 a month, but double that amount is likely above market for house rentals.

If HOA/insurance/taxes should be included on the expenses part of the equation, double just the mortgage would still be high rent and I can't figure out what folks would be spending big on for maintenance of a property which is not super old or in need of major rehab. I get that sometimes AC breaks or one needs a new water heater, but I'm having trouble getting to any high number for expenses.

I know my local markets extremely well, in terms of changing demographics of renters and what people are comfortable paying and what is available for purchase or rent, but I'm struggling with what should be on my spreadsheet and would love advice on what I'm not thinking of. Thanks!

@Amelia G the 50% rule is intended to just be a very rough rule of thumb for quickly screening lots of properties. Once you hit on something you're interested in, you would want to then do what it seems like you're already doing, and discard the rule and switch to a bottoms-up analysis. Some properties have HOA, and some don't; some have all new HVAC, and some need to be replaced right off the bat; etc. And, those costs can be the difference between positive and negative cash flow. So, when you say "it just might not work for mid-priced properties in the Las Vegas market," you may be right =)

Originally posted by @Nicholas L. :

@Amelia G the 50% rule is intended to just be a very rough rule of thumb for quickly screening lots of properties. Once you hit on something you're interested in, you would want to then do what it seems like you're already doing, and discard the rule and switch to a bottoms-up analysis. Some properties have HOA, and some don't; some have all new HVAC, and some need to be replaced right off the bat; etc. And, those costs can be the difference between positive and negative cash flow. So, when you say "it just might not work for mid-priced properties in the Las Vegas market," you may be right =)

Cool. Thanks. I *think* I have mostly actual numbers. Of course, will there will HVAC issues (not something that can usually wait even a day in Vegas for most of the year) is unknown. I'm guessing some of the older properties investors favor in Southern Nevada are likely to need things often, so I might be applying great math for those and finding it does not work for more recent builds. 

 

Originally posted by @Wayne Brooks :

@Amelia G Not sure where “double the mtg” comes from. The 50% “rule” is a rule of thumb that says your actual expenses, excluding any mtg pmt, will be about 50% of the rent. 


 Am I misunderstanding the idea that expectation should be expenses are 50% of rent and mortgage payment + profit are the other 50%? I'm having a little trouble getting my head around when that would add up.

Originally posted by @Amelia G :
Originally posted by @Wayne Brooks:

@Amelia G Not sure where “double the mtg” comes from. The 50% “rule” is a rule of thumb that says your actual expenses, excluding any mtg pmt, will be about 50% of the rent. 

Am I misunderstanding the idea that expectation should be expenses are 50% of rent and mortgage payment + profit are the other 50%? I'm having a little trouble getting my head around when that would add up.

Keep in mind the mortgage payment includes principal, interest, taxes and insurance. Taxes and insurance are part of the expenses included in the 50% rule. You will want to subtract that portion out of the mortgage payment.

I have found the 50% rule works better for multifamily. With my single family homes, my expense ratio is lower. Like any rule of thumb, it is not precise.