All Forum Posts by: Ralph Hunter

The 50% rule is used by investors to gauge the profitability of an investment opportunity. Rental units average a NOI (Net Operating Income) of 50% of the gross income. If you purchase a unit that can create a profit after subtracting 50% for expenses, any property management costs and then mortgages, then you will have a property that cash flows. Thinking you can beat the odds by lowering expenses just does not work. So stick to the 50% rule.

Here is how it affected this potential property. I have broken down the 50% rule so you can see where the expenses are allocated. 

$  2,100   Gross Monthly Rent

$25,000   Gross Annual Rent

- 10% Vacancy Rate

- 10% Property Taxes ($2,500 Annually)

- 10% Property Insurance

- 10% Repairs/Maintenance

-  5%  Owner Paid Utilities

-  5%  Capital Reserves

- 50% Expenses

$12,600   Expenses

$  5,000  - 20% Additional Property Taxes ($5,000 + $2,500 = $7,500)

$ 7,600  Net Operating Income

Out of this number you would subtract the annual cost of property management and your annual mortgage payments. What is left is your profit before paying income taxes. 

I would agree that putting not only the contractor but the names of whom he has selected to live in the units on the lease is a really good idea.

Before you factor in your mortgage, see if it can cash flow. Assuming a gross rent of $2,100 per month means you will earn $25,200 annually. First, property taxes of $7,700 are really high. You need to look into that. That expense on its own represents 30.5% of your gross income. 

Using the 50% rule (which does not include property management or mortgage costs) there is only allocated 10% to property taxes. Adding in an additional 20% will create an annual NOI of $7,560. Out of this amount you will need to pay your mortgage, any property management fees and yourself. If you take out the minimum monthly profit of $100 per unit, you should earn $3,600 annually from this investment. This leaves only $3,960 to cover your mortgage costs which is only $330 per month.

Unless you can lower your taxes, this does not look like a viable opportunity.

First, I would try to remedy the situation without resorting to sending official eviction notices. If she refuses to pay the rent, then she needs to understand that she must move out. See how she responds to that. If she agrees to a date, then type up a kind letter summarizing the conversation and send it to her - just as a memory aid "since we all tend to forget conversations." If she does not move by then, well it would be time to take a more severe approach. 

You would be considered on a month-to-month basis legally speaking. You need to find out the eviction laws for the location of the house. Typically they require 30 days after providing written notice using a state approved form. If the 30 days pass, you can then have the sheriff evict them. But I hope that it does not come down to that. 

I would definitely find a way to include that unit with the second floor rental. Turning it into a laundry room, however, may not be the best use of the space. If there is a sufficient amount of area, why not turn it into a master suite. I am assuming that the existing second floor unit is already a two bedroom. Adding a third bedroom should get you more rent than a simple laundry room and I doubt you would need to pull any permits since the bath is already there. 

The 50% rule is used by a majority of experienced investors. It is a good way to estimate the expenses. As for a specific amount you should anticipate for maintenance and repairs, in my professional experience, I recommend setting 10% of the gross rent aside. This will account for general repairs but not capital expenses which is typically another 5%.

I would follow the same process that you use for other tenant applications. He should fill out the application and agree to a quick credit check. But if the military is using them, then they must be pretty reputable. You could ask for the names and phone numbers of other landlords that he has rented from and give them a call. I feel that is 

Personally, it sounds like a good situation. Having a business paying the rent rather than the tenants seems much more likely to get your monthly payment. I doubt he would want to be hauled into small claims court for non-payment of rent. 

I would make sure that you get the highest allowable security deposit. I would also lock them into a full 12 month lease (there is more security for you). You may want to limit the number of workers/tenants allowed to live in the unit.