50/50 Rule: Does this typcially include CAP EX?

Question

Hello BP Family

In order to get a better understanding of analyzing buy-hold deals (SFR and Mult-Family), I am going into the MLS and looking up CLOSED properties and running the numbers that were provided by the listing agent(s). NOW, I understand that there is A LOT more due diligence that would need to be considered to get a true picture of the deal, but I am noticing that the average expenses outlined in the MLS is between 42-44% of GSI.

So my question: If you use the 50/50 rule, would this cover CAP EX?

I know some investors who add $250/door for CAP EX and calculate 40% for other expenses, which includes 10% for vacancy, taxes, insurance, repairs/maintenance, property management (NOT Debt Services).

IF they don't separate out CAP EX per door, they use the 50% expense rule.

Thoughts?

David Faulkner · Answer

If you are just going to use made up numbers in the place of real analysis, then they can be anything you want them to be. Do you want them to cover CapEx? Then sure, they cover CapEx.

Jeff Petsche · Answer

@Ben Wilkins Thank you for your insight Ben. Much appreciated and got to love the investment game where nothing is really so black and white.

Ben Wilkins · Answer

@Jeff Petsche - the 50% rule is a rule of thumb only. Depending on the market, I sometimes use 60% for expenses.

50% rule includes all expenses other than financing. It is generally broken down as maintenance, CapEx, taxes, insurance, property management, and vacancy.

Depending on your local taxes, vacancy, etc, you might find yourself above or below the 50% rule.

As far as splitting out $250 per door, this would depend on the individual property. It doesn't make much sense to do $250 per door on a new building, since everything is... well.... new.

Conversely, if a building is older, you might want to set aside more than 10% to prepare for the items that are bound to be coming up in the near future.

Hope that helps clear up the mud a bit!