50% rule. Should we use this on small multi family properties?

Question

I’m trying to put together my first buy and hold deal somewhere between a single-family residence and a four Plex most likely. I’m using the 50% rule for every property I come across and none of the numbers seem to be working out after I also figure in the debt. Should I be using the 50% rule in every case or is that just left for larger multi family deals? At first I was just thinking the area I’m in just didn’t have any good deals but I want to make sure I’m being fair when figuring a price that makes sense for both parties.

Anthony Dooley · Answer

@Oleg Brown I have found that typical expenses for my properties are between 35%-40%. Debt is not an expense. Debt is below the line and should not be included in your 50% rule. If your expenses are 50% one month, no problem. But if they are actually 50% consistently, you are being robbed.

John Warren · Answer

@Oleg Brown I think the 50% rule, like many rules of thumb, is useful as a starting out point. There are obviously going to be differences once you get into the mechanical structures of a property. Some properties are built where the tenants pay utilities, while others have the land lord paying the utilities. One of my buildings locally here in Berwyn has a central boiler, while my other building has forced air units that the tenants pay. This obviously affects how much my expenses are.

I have also found that buildings I self manage tend to out perform the 50% rule a bit. The ones that I have with management companies tend to follow or exceed the 50% rule.

Matt Crusinberry · Answer

@Oleg Brown, I am inclined to agree with both of my BP colleagues. The 50% rule is a quick assessment of the property, but running actual numbers is what you're going to want to do. Call the utility companies, insurance companies, and figure out what your actual expenses are. This will also help you should you find 2 properties that are very similar as well. Good luck on your hunt!

Bjorn Ahlblad · Answer

@Oleg Brown Personally I find the 50% guide to work well on all properties and there will always be exceptions like tenants paying water as well as other utilities so make sure you know where not to apply it. I check with actuals and add vacancy etc.

Brock Mogensen · Answer

The 50% rule is a good rule of thumb however you'll want to dig into the trailing 12 month (T12) numbers to get a true picture of the deal.  Some owners may not have a T12 but try to get as much info as possible in regard to the expenses.  Smaller properties can usually be ran at less than 50%, especially if you are self managing.  However, it's always good to be conservative.

Brandon Wells · Answer

If you want to true indication of how properties are performing in your area (Income vs Expense averages across multiple property types), let me know.  As a CPM®, I get an annual income/expense report (would be more than happy to assist someone in going over it as well) for the entire country that is widely used by some of the nations largest PM companies and even some really successful CRE Brokers.

I prefer to deal in actual data and know what the true expense averages are, per category, in my area when evaluating a deal.

Todd Dexheimer · Answer

50% rule is an estimate and that is it, sophisticated investors are not thinking about the rule. You should be looking at each individual line item on a property, to determine the expenses and understand what the property type and age is running at in the area you are investing. Your property manager is a good resource for that.

Jay Chang · Answer

The 50% rule is more accurate for areas where the properties are not as expensive. In areas with expensive properties, like LA and NY, the ratio is more like 40%-45%, and 35% for newer buildings. T-12 is good reference, but try to get a $/unit for each expense. Keep in mind that the $/unit for expenses like maintenance is going to be larger for smaller multifamily buildings, so speak to a property management team to confirm your underwriting before putting the property under contract.

Good luck!!

Agostino Pintus · Answer

There are many dependencies. Smaller deals (under 16 units) will often see expense ratios under 50%. It's important to note though that on C-Class properties, these deals will require more maintenance than a B or an A. So, 50% may be a good place to start, but you also need to consider who is paying for utilities (water/gas/electric). In many of the older C's in the Midwest (and especially on larger deals), there are typically boilers that heat an entire building. This means you are paying heat. Your winter expenses will be greater. However, if the units are sub-metered for water and have their own heat, your expenses will likely be under the 50%.

So, as a rule of thumb, 50% is a good place to start (I go as high as 55% when first assessing a deal to be conservative). Be sure to do your due diligence to understand what the true expenses are.

Tj Hines · Answer

@Oleg Brown the 50% rule is generally used with larger properties at scale. On a 4plex, expenses shouldn't be no more than 20-35% of the GPI

50% rule. Should we use this on small multi family properties?

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