50 percent rule in my world

[John Soforic]

In reviewing past threads, I admit being sent into a mild panic over this 50% percent rule of thumb, despite the fact that I am experienced and currently own and operate 41 units... single family and duplexes with one 4-unit. I am an absolute number crunching geek, and while my truck may get messy my accounting is spotless and meticulous. So my point is I know my numbers, track every dime collected and spent on Quickbooks, impose the numbers onto another Excel graph, etc. You get the idea.

Am I correct in assuming we are dealing with a general rule of thumb that applies to the entire country, and as such it may be a broad generality with wide variability? I question whether it applies to Small Town, rural America. The facts are that in my area, taxes are lower, the cost of housing is lower (thus cost of insurance), and I do not hire property management. These local facts lower my overall percent of expenses which end up looking like this...

A common duplex rents for 550 each side (tenants pay utilities)

+13,200 gross rent

-1000 repairs per year (every five years = a $5000 bomb hits the property!)

- 2000 annual taxes

- 500 insurance

- $600 vacancy (5%)

= 9100 net profit before taxes and insurance

So in this example, which is accurate reality in my accounting world, my expenses are 31 percent- not close to 50%. Am I missing something? Or is it just that I can cash flow higher because I live in a rural area with no real appreciation? Even with 10% property management fees my operating expenses would be 41 percent... and I suspect more trouble on the rental side which may account for added expenses.

To be clear, I am not bashing the 50% rule. Why NOT estimate high on expenses?

I love conservative rules that keep me from hurting myself. Real estate to me is a chess game in which one needs to be on the lookout for trouble in all forms. I believe it is a valuable general rule of thumb to keep an investor safe; i.e., it provides a margin of safety. If I misunderstand the concept, please advise. Maybe it's property management that is costing others so much, and adding to the expenses? The purpose of thread is just to clarify it all.

[John Soforic]

@Ophelia Nicholson, @Brett Russell @Duncan Taylor @Chris Martin @Jeremy D. @Justin Pierce @Jeff Greenberg @Matt Devincenzo @Sharon Tzib @James Syed @J Scott @Gerald K. @Will Barnard @Fran Flanagan @Joshua Dorkin

To all who helped me dig deeper... I've been deep in the books during the past week since this thread was discussed and disected. And, low and behold, I am now a new convert to the rule of 50 percent. In the end...

My rental expenses totaled 39 percent of rent collections for the past three years, which is in line with the 50% rule since I self-manage (which adds another 10-12 percent, not too mention the increased costs involved with absentee management). So if I hired out management, I'd be over 50 percent gross.

In the end, I just want to answer all of you who took the time to respond to this thread, who disagreed with my assertions, and who made me better for it. That is an awesome service to me. Thank you for your time.