Does the 50% Rule include Property Management Fees

Question

Anthony Angotti · Answer

The 50% rule does include management fees, but be careful with this rule. Use it as a preliminary evaluation only. Think of it as a quick and dirty screening rule rather than something to make a decision on. Real life example: Is this bread moldy or not moldy? It's moldy....definitely don't eat it. It's not moldy, let's see if it's stale and the right kind of bread for me.

Okay poor analogy BUT

Use the calculators here to do a more thorough analysis of all properties you want to buy. They will help you consider all of the costs of buying a property. Trust but verify all data you get from someone. If they can't verify numbers they are giving you (rents, utilities, fees, etc.) they are probably full of it and just guessing.

Joel Owens · Answer

This forum is multifamily so I will assume the poster is talking multifamily.

If talking multifamily and not SFR over the life of the asset you do generally average 50% costs. On a brand new build it might be less the first up to about 8 years but will start rising.

Owners who claim 35 to 40% opex upon inspection I have found deferred maintenance that had to come off of purchase price. The seller cut corners while owning and patched things together. Some will also self manage but you have to include management in your cost to be conservative.

If the building is older and landlord pays utilities ( especially water ) I see costs run up to 60 or 65% in some cases.

These estimated costs are just a quick guideline. You could buy showing less expenses but if any little blip happens you can go from making money to losing it fast. Better to be safe when buying than sorry.

Joel Owens · Answer

It's just a simple way on the surface to initially evaluate a property within a few minutes to see if further evaluation might be warranted.

I have seen people in the past get so involved with analyzing that the deal was gone by the time they wanted to do something. There is an efficient process to follow with steps where you go deeper with due diligence at various stages ( initial inquiry, LOI submitted, purchase and sale signed ). At each one of those steps you get closer to a purchase but also start spending more money on reports and attorney fees.

After you have reviewed thousands of properties you pretty much know after a first look if you want to look closer or not.

The 50% analysis is a starting point and NOT an immediate YES to buying a property. I am talking about multifamily. Other asset classes such as retail properties work differently.

David Faulkner · Answer

Wouldn't a very similar analysis of two identical multi-family units or buildings in two different markets with different rent also illustrate that the 50% rule is equally absurd for multifamily as it is for single family? I think it would. The problem is that of the many expenses included in the 50% rule, very few of them scale. Now, if you are talking using some percentage (maybe not 50%) of income as expenses as a quick gauge, and that percentage is very specific to that market and that asset class and you understand that it is not likely to hold up very well in a different market or asset class, then ok, it might be a decent rough estimate. Problem is the newbies are typically not using it that way. And even if you do use such a percentage in this way, it is not wise to ultimately purchase off of it without thorough due diligence to validate all of the income and expense numbers, so you end up needing to know how to do the real analysis anyway. So, in summary, I think such rules are very dangerous if used as a tool to bypass actual thought and analysis, which so far as I can tell is the way most newbies attempt to use them. I'd rather just see them learn to properly use grass roots estimates that they then validate then attempt to short cut around them ... then, when they get a ton of transactions under their belt like Joel, then they can understand which short cuts they may be able to use, when, why, and most importantly when not to, and even seasoned veterans get burned on bad assumptions from time-to-time so even then extreme care is needed.

Mark Barnes · Answer

@Anthony Angotti thank you for that.  It was a good analogy, one that I could identify with.  Also I agree with "trust but verify".  Thanks for the reminder there.

David Faulkner · Answer

50% rule is garbage, as are the other "rules of thumb" touted here on BP. Please allow me to illustrate:

Let's take two physically identical properties, say both are 3 bed, 2 bath single family homes, 1200 SF, tile roofs, stucco exteriors, 2 car garages. The only physical difference is one of them is in Burbank, CA and the other is in Phoenix, AZ. The house in Burbank rents for $3,000 a month and the house in Phoenix rents for $1000 a month. 50% rule says that the expenses in Burbank are $1500 a month while expenses in phoenix AZ are $500, for the SAME EXACT HOUSE. Does that sound reasonable to you?!?

Total rubbish ... my advice is to learn how to analyze (really analyze) income and expenses by looking at actual income and expenses from that property wherever possible and comparable properties of the same type and in the same market to compare. If your are assuming income or expenses different from those (whether higher or lower), then you should be darn confident in your thesis as to why they will be different for you. While I'm at it, I wouldn't touch the BP calculators with a ten foot pole either ... complete garbage IMO.

Mark Barnes · Answer

Great thank you each for responding.

James Syed · Answer

@Mark Barnes

Yes, 50% rule includes property management.

Fred Heller · Answer

The 50% rule is supposed to include all operating expenses of the property, including taxes, insurance, maintenance, property management. It does not include the mortgage payment.

Bryan H. · Answer

yes

Does the 50% Rule include Property Management Fees

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