50% Rule?

[Jerry Going]

Hello everyone!

So I am brand new, and basically have no idea what I'm doing. So, I decided to at least start with the free course bigger pockets offers. Love it , so far! However, I do not understand the 50% rule. Maybe I missed the explanation, because I view the course at odd times. Either way, what I don't understand is what happens to the "other 50%"? In the course (and correct me if I'm wrong, please) it explains that you take 50% of whatever the monthly payment is, and from that you subtract the mortgage. What's left over of that 50% after the mortgage is removed, is your "cash flow"? What does the other 50% go to? 

[Craig H.]

Howdy. 

Assuming you are charging market rate rent your expenses will be 50% or less of your rental rate (taxes, insurance, 8-10% vacancies, maintenance, and management fees (usually 8-10%)). 

What is left over is what you pay your payment out of. Anything beyond that is your free cash flow. 

$800 rent

$400 expenses 

= $400 NOI (net operating income).

From that $400 you pay your mortgage. Whatever is left is your cash flow. 

So when you are looking at a deal one of the first things you want to do is determine market rent and assume half goes to expenses and then determine if you can make your payment out of the rest and have anything left over. Then decide if it's worth it. 

Craig