Understanding the 50% rule

[Jabari Marshall]

Hi All, Would someone explain to me how the numbers would fit in to the 50% rule. To my understanding half of your total rent will go towards your expenses. So correct me if i'm wrong but half of my rent should pay for my.............mortgage? I'm looking at duplexes now and i'm trying to figure out which ones will meet the 50% rule but i'm not sure what numbers to plug in. I will try to give you some numbers, hopefully this will work. 1st duplex: aking 165k 2bdrm/each unit rents 775 per unit taxes 2500/yr 2car garage 2nd duplex:asking 139k 1bdrmm/each unit rents for 600/month taxes last year/1780 no garage

[Aaron Montague]

The 50% is a good "rough in" way of looking a deal quickly.

1st Duplex in your example:

Income 775 x2 = 1550. Div by 2 brings us back to $775 to cover your mortgage.

If you pay asking with 25% down and 6% interest rate over 30 years your mortgage payment will be $742. This leaves you with a positive cash flow of $33.

The $775 used on the expenses side of the 50% rule covers:

Taxes
HOA
Insurance
Management Fee
Maintenance (deferred and immediate)
Trash
Sewer and Water
Any House Wide (manager account) utilities (porch lights and such)

There are many more possibilities and you won't pay some of the above depending on what you are purchasing. Again, a "rough in" kind of number.

At this point you need to decide if this place is worth pursuing. $33 bucks a month is a lousy return no matter how you look at it. If you decide that "anything with a positive cash flow is worth investigating," you need to do your actual due diligence.

Find out how much the expense are actually going to be. Decide on a conservative number for monthly maintenance costs and recalculate your number. The expenses may be higher than 50% (this deal gets even worse) or lower (the deal gets better).