50% rule $800 rents vs $400 rents

[Isiee Koch]

Hi, when analyzing multifamily using the 50%rule of thumb, would the same rule apply for 800 dollar rents  like 400 rents? How would that work?

[Andrew Johnson]

@Isiee Koch Rules like the 50% rule are for really quick back-of-the-napkin analysis.  So it's not that they do or don't apply to a particular property, particular rent threshold, etc. but rather that they "kind of" apply to all of them.  The person who is paying $5000/month for rent has a different fit-and-finish expectation that someone who is paying $500/month for rent.  So even though it's popular to say "all expenses are the same between X and Y" they really aren't.  Now are they proportional?  No, but since you're just using 50% for the back-of-the-napkin analysis it doesn't really matter.  Are you going to use property management?  Is the prevailing rate 10% or 15% or 8% where you live?  Was the property built in 1915 or 2015?  Is it $400/month because it's in a warzone or $400/month because it's a 300 sq ft studio?  Is the property a 4 bedroom/2 bath home at $800/month or is it a 1 bedroom/1 bath apartment?  There are just so many variables in the equation that change things.  So, at the outset, when you're doing quick analysis to see if a deal is worth learning more about I'd use the rule equally.  It's value, to me, is more about pushing out "obviously wrong" deals than telling me "yes, buy it!"  

I hope that helps...