Does the 50% Rule Apply to Newer Homes?

Question

I am trying to figure out how to move out and rent my SFR primary residence (built in 2009, I have been the only owner, and it is in good condition). I've used Dealcheck.com to analyze the numbers and with the 50% rule assumption (and 8% vacancy), it is telling me that I'll be at a loss of $118 per month. I have questions:

• Does the 50% rule apply to newer homes? I realize this won't always be true, but as the owner I havent experienced that much in terms of repair/maintenance. 
• The rent rate I used in the calculation is based on the 1% rule but is $235 below what rentometer.com tells me comparables go for in my area, so is my vacancy assumption too high?

Side note: I'm using below market rent in the analysis. Actual rent rates would be competitive, but likely a bit higher.

Thanks!

Jon Holdman · Answer

The taxes and insurance part of your PITI payment is included in the 50% rule of thumb.  It truly is just a rule of thumb.  Some months, even years, will be better.  You'll have a tenant in place the entire year, have minimal other expenses, and mostly just have taxes, insurance, and debt service to cover.  But once in a while you'll have something big.  An eviction, serious tenant damage, a new appliance or AC, sewer line, etc.  So, in any one year, the actual expenses may be somewhat under 50%.  They can also be higher than 50% if you do have a big expense.  They can even be higher than 100% if you get a big hit in one year.

Something else to be aware of is that the 50% includes property  management.  Around here that's typically 10% of collected rents plus  half a month's rent to fill a vacancy.  Half a months rent is 1/24th of  your annual gross, about 4%.  So total for property management is about  14%, which is roughly a third of the 50% number.  If you manage yourself  you can earn that slice, too.

If you do change this to a rental, be sure to change your insurance to landlord insurance, not homeowners.

Do what @Curt Smith suggests to scope out the competition.  I would go a step further and actually call the current offerings and get details - security deposits, who pays utilities, application fees, what's their process for viewing and applying, etc.  What you get for rent is a VERY key number and spending some effort to get an accurate number is time well spent.

Curt Smith · Answer

@Brett Rhine  See my how to buy bullet proof rentals an uploaded file off my profile, down on the right.

Jon Holdman's 12k up votes speak for themselves as does what he said, but the general formulas don't actually apply for forced landlords.  IE you having to move on for family/job issues.  When you have a forced rental, my sell/or keep decision is purely based on positive cash flow or not.  You may own in a decent appreciation area so you may choose to keep for none ideal investment reasons.

In a sellers market its tough to sell a nice property even if it doesn't gush cash flow!  Of course if you where a pro landlord you wouldn't buy your house because of it being too expensive etc.  The question I'm guessing is will you do "ok" by keeping it?

Your use of rentometer I view is low.  Jon gave you the tip you may not have heard.  Go to zillow rental, craigslist rental.  Look at the pictures, in and out, maybe even drive those rentals.  Find the similar ones (functionally and niceness) what are they renting for.

My Bullet Proof paper will say, undercutting going price may not work as you;'d expect.   Better tenants see value being priced into a proper priced rental.  And may see below market price to be telegraphing something is wrong.  In a fast rental market you are actually (counter intuitively) better pricing the rental correctly.  This is not true in a low market I agree.

Jon Holdman · Answer

Much of the maintenance on a rental is caused by the tenants.  They just tend to be not as careful as when they're the one paying for any repairs.  Further, your house is now approaching the age when things, like appliances and faucets, will need to be replaced.  Things you might use for 10+ years (e.g., carpets), will age much quicker in a rental.

You cannot estimate rent as 1% of the value, which I think is what you're saying.  Rentometer is a better way.  Better still is to do a thorough rent survey in the area and determine what similar houses near  yours rent for.  You want to be very competitive.  That is, one of the best deals in the area.  Sometimes new landlords think "I'll price mine high because its really nice."  Or "I want a good tenant".  If you want to have your choice of tenants, price it to be a good deal.  If you price yours high, you'll only get a few takers and they will be the ones willing to pay a higher price because they've been rejected elsewhere.

Thomas S. · Answer

Data indicates that over the life time of a property the expenses will on average run 50%. This means that some are below, some are above to create that average.

Your actual expenses will be determined by how long you hold the property not how old the property is.

As a example you will need a new roof in about 10 - 12 years. Maybe new windows and depending on the amount of damage tenants do all sorts of other costs that would possibly not be required if the home was owner occupied.

Something to keep in mind is that newer homes will be devalued by tenants quicker than a older home that has been fully broken in by tenants. This increases expenses initially until the property is "seasoned". If you rent a newer home with the intention of short hold you will have additional costs associated with bringing the property back up to sellable condition. Tenants are harder on a property than a home owner.

The 50% rule is a guide line for guestimating expenses based on the life of a property. If you hold a new property for two years and sell your expenses may be lower than 50%, hold for 20 years your expenses could be higher.

Sonja Moseley · Answer

What if you're looking at new construction Townhomes? Since much of the exterior maintenance like roofs is part of the larger property, would it make more sense to lower that percentage? There are an abundance of townhomes around here that are starting to look more and more appealing from a cash flow perspective, but I want to make sure I am covering myself for longer term maintenance.

Brett Rhine · Answer

Thanks @Mike H. All of this is very encouraging. Assuming that I have to go  with conventional financing then I have maybe a year or more before I'm ready to buy, that will give me a lot of time to build up a nice cap ex buffer (especially since I'm house hacking right now and living for free). With 5-10k sitting in a savings account for just such emergencies that should help  the cashflow situation a lot.

Thanks again!

Brett Rhine · Answer

Thanks for the education, @Jon Holdman, on the 50% rule. I didnt know that it included PM, for instance. Since I will be self managing, I can at least be sure that I'll be working harder for myself than a PM will.

Obviously I'm going to have to do more legwork with regard to properly pricing my rental. I guess the Internet can't tell me everything I need to know.

Thanks again!

Brett Rhine · Answer

@Curt Smith I just scanned your bullet proof rental file. Wow! Thats a lot of great information. I'm only just starting out and I can see where a lot of what you include here is the product of hard-won experience. I'm sure I'm going to reread this several times.

"The question I'm guessing is will you do "ok" by keeping it?"

Yes, I will. I've been house hacking for over a year now so I'm currently living for free. The mortgage is getting paid down by my tenants and I'm stock piling cash for my next purchase. On top of that, Zillow tells me that I've got 40-45k in appreciation as well. So that gives me a few options, too.

As far as your last your last paragraph goes, I can see the logic: "whats the catch?" is what they could be thinking if they see something priced substantially lower.

Does the 50% Rule Apply to Newer Homes?

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