Can I trust the 50% rule to run the numbers on my first deal?

[Kelly Byrd]

My wife and I are looking at buying a smaller (4-8) multi-family unit for our first property and investing remotely. We're trying not to get overwhelmed with getting all the seller's data for and analyzing hundreds of deals. I'm wondering how far the "50% rule for expenses" will take me for running the numbers.

What I'm thinking is that we take all the available things in the neighborhoods we have identified, figure out rents (whether stated or not in the ad, we've been able to work out good guesses from past for-rent postings online or various rent estimators), use 50% of gross for expenses, and then figure out financing costs and finally cash flow. That 50% includes setting aside money for large capex items, although I'm going into this first deal with some cash reserves set aside already.

For anything that makes it thru this filter, we get detailed info from the seller, but I'm wondering if regardless of what the seller's stated expenses are, can I just can I count on 50% as a worst case when deciding to make an offer? If so, I may end up passing on deals that would have worked for us, but I'm wondering if this is a conservative approach would work until we have a feel for actual costs. 

Thanks for any advice.

[Roy N.]

@Kelly Byrd

Such a rule of thumb may allow you to quickly triage properties, weeding out those which stand little chance of being a profitable deal, but I would never underwrite a purchase using it.

Best to capture all the real data you can and perform a discounted cash-flow analysis on the property to see if it provides a rate of return which meets your requirements.