50% rule and a newb

[William Pickett]

I have been reading non stop for awhile now and also out looking at properties in my town. I live in a small town south of Nashville, TN. most homes I would be looking into are older, 1970s, 50-70k homes. 3 bd. 1 -1.5 baths. Most rents in this town are 450 to 600 a month. How in the world does the 50% rule come out on a home that is 50k and 550 rent?

When I run the figures it does not look like a deal and should be passed on. I know people that are buying these homes but how are they making money? Again I know what the 50% rule is and how to figure it but for a 50k home and 550 rent I just dont see making money.

When the market was up these same homes would go for 70 to 80k if that helps.

Anyone care to clear it up.

Thank you again for all the help. Still learning.

[J Scott]

You guys are talking about two different things:

1. The 50% Rule basically states that for a large and diverse sample of rental units and over a long period of time, expenses (including rent loss and capex) will be somewhere in the 50% of gross rents range.

2. "70% - Repairs" is a formula for determining if a property may be a potentially good flip candidate.

William - $50K and $550 in rent isn't a great deal, but if you have good financing in place (or are paying cash), you can certainly cash flow. Not sure if the returns will be enough to make you happy, but you'll likely get cash flow positive, even with leverage.

It's also possible that these deals are typical in your area. Not every area will have awesome rental property deals available, which is why a lot of buy-and-hold investors will buy outside their local area.

You need to run the numbers and determine if the returns are good enough for you. If not, you'll need to look for better deals or look in other locations.