Another 50% ratio/cashflow question

[Justin Girod]

Hi everyone, I just discovered this site a few days ago and have been doing a lot of reading and have learned a LOT. My question is regarding the 50% rule - my understanding is that it is a fairly conservative ratio of operating expenses to rent. Some properties may run at less and some may run higher than 50%.

Operating expenses being :

Property taxes
Maintenance
Vacancy
Property management
Advertising, etc.
Capital expenditures.

The operating expenses do not take into account purchase price or mortgage rates, so is this really an accurate tool to use for cash flow?

For example, say there are two similar properties, in two different markets.

Property 1 - 1000 sq ft bungalow, 30 years old, small town

Purchase price $100,000
Rent @ 10% - $10,000 per year
Taxes @ 1% - $1000 per year
Insurance @ 3% - $300 per year
Vacancy @ 8% - $800 per year

Remainder for 50% rule on Capital costs, property management, maintenance etc = $5000-1000-300-800=[b]

Property 2 - 1000 sq ft bungalow, 30 years old, downtown major center

Purchase Price - $500,000
Rent @ 10% - $50,000 per year
Taxes @ 1% - $5,000 per year
Insurance @ 3% - $1500 per year
Vacancy @ 8% - $4000 per year

Remainder for 50% rule on capital costs, property management, maintenance etc = $25,000-5000-1500-4000=[/b]

Capital costs, property management, maintenance etc should be similar for the two properties, should it not? I realize that if you're in an area with higher property values labor may be higher but not that much higher....right?

If I was to use the $2900 in property 1 my ratio would be ($5000+1500+4000+2900)/50000 or a ratio of 26.8%

So I guess my arguement is that with higher rents the operating expense ratio becomes less relevant and mortgage rates and purchase price become more relevant. Thoughts?