Does the 50% rule hold true for lower end properties?

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I don't subscribe to the 50% rule. Our buy an hold model has our non-financing costs at 25% of our monthly lease payments. Here is the breakdown for a typical $100K house:Monthly lease: $1,387Monthly property taxes: $125Monthly property insurance: $42Monthly property management fee: $150Total Monthly expenses: $317Expense to Income ratio: 22.86%We only buy brand new construction homes or turnkey properties. We only enter into long term lease-purchase agreements where the client puts a substantial non-refundable deposit to purchase the home over a 30-year period (7.5% of the purchase price). Our property management fee covers renter's insurance, a home warranty plan, weekly exterior maintenance (all of our homes are zero-scaped) and annual maintenance of the property's systems (HVAC, floors, ventilation, and pest control). Just like when you lease a car, the tenant is responsible for all maintenance of the house, but all of our new properties come with a 10-year warranty and our turnkey properties come with a 1-year warranty and are in like-new condition.The trick to above-average ROIs is to reduce costs. We do that by managing and shifting risk. Here we manage maintenance risk through a thorough preventative maintenance system (I used to be the Street Maintenance Manager for the City of Lancaster, CA) and we shift risk through the lease-purchase by receiving a large non-fundable down payment and making the tenant/buyer responsible for all maintenance.We set the purchase option price at a premium of 18% since the tenant/buyer has 30 years to execute the option. We use 100% financing on the purchase of the property and come in leveraged at 7% of total costs. Our after-tax annual net cash on the first year is $1,224 which produces a ROI of 24.8% on an initial investment of $4,935 to buy a $100K property.God Bless You!

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Yes, it is very possible that on low end properties your expenses will exceed 50%. That's true on any property. The 50% rule is just an empirical rule of thumb derived from actual operating data on large groups of rentals, mostly apartment. There are always outliers in any dataset. Some units will have large expenses in some years. Many will be below 50% for years and years, then have a single large expense. With low rent units, you have less room to wiggle. A furnace is the same costs whether its in a $600 rent house or a $1200 rent house, but its a much large hit on the low rent that the high rent.That's a lot like saying "I don't believe in gravity."If that's your model you're going to fail. Your model assumes you will never have a vacancy, never have a capital expense, never have an eviction, never have even the most minor repair. This isn't a realistic model. Its the absolute best case. Many months will in fact be this best case. Its the ones that are not that are going to kill you. Make whatever model you like. Just like gravity, reality will be what it will be.In any case, you model isn't a buy and hold model at all. Its owner financed sales. Which is a whole different can of worms. But apparently you assume you will never have a foreclosure, never a missed payment or anything.

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I really want to learn more about rental properties and lease deals it looks like you have to get very creative in times. Michael Evans it seems to me you are very knowledgable in this matter do you mind if we connect if you have time and maybe share information when ever you get a chance . Thanks Gerry

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Thanks Michael. I believe property managers usually take 10% of the gross and any expenses or vacancy fillings are extra; how did you negotiate them receiving a flat rate for all repairs, maintenance and insurance? It seems to me that a major roof repair would wipe out several years of their profits!

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The answer is "it depends." If your rent is only $600 you better find a cheap roofer because construction costs don't go down because your rent is low. Secondly, some areas are so poor that their tax base is falling apart. This forces them to charge high amounts relative to value for property taxes.Like you say, the ratios are higher. One way is to figure repair value as part of your purchase price upfront and start with a property that is in great shape and where all costs are included, and the rent is still good compared to the total cost of the property IMO.