Using the 50% rule backwards to evaluate viability of a market

[Chris Mason]

50% rule: rent * 50% - P&I

I'm over here playing with my financial calculator, and found something interesting.

Rent * 50% = what you want your P&I payment to be equal to or less than.

You can use that and a financial calculator to back into how high the mortgage could be and, it still make money.

So if there's a triplex that pulls $3650 / 2 = $1825, the mortgage could be as high as (brb financial calculator...) about $370k which works out to a purchase price of about $495k. 

However real estate is mostly valuated (by everyone BUT investors - sellers, realtors, lenders, appraisers, etc) based on recently closed comparable sales, and thus he got that triplex for $305k.

The implication SEEMS to be that this town could appreciate significantly before becoming a bad place to invest. Expressed alternatively, home appreciation is lagging behind rent hikes. Basically we're finding the spread between what the overall market values homes at, and how an investor could/should/would value it. This seems to imply that if you find a spot where there's a wide gap between the two (between actual sales prices and the "50% rule backwards" approach - $305k and $495k in this example), depending on which way it goes, that could be a warning sign to stay away OR an indication that it's a good town to be looking at.

This also has implications for rent controlled areas. If that triplex gets stuck with 3 rent controlled tenants, it might be tough to sell it for more than $495k *even if* it's been X years and comps support >$495k.