Utilities included in the the first 50%, using the 50% rule

[William R Johnson]

I have a question regarding the 50% rule. I am looking at buying a three flat and I want advice about how to run the numbers on this building. I understand that the 50% rule is a very good conservative way to evaluate properties. I believe that it says 50% of gross monthly income should be set aside for expenses separate from the mortgage. Can the monthly utilities charges be paid from that first 50% then, or should it be saved for emergency maintenance? Here's my numbers for clarification. Purchase price $85000 Monthly gross income from rent $1925 Mortgage $350/month Taxes $100/month Utilities averaged for the year $300/month Any advice is welcome. This will be the first multi family property so I want to make sure it's a great deal. Thanks.

[Jon Holdman]

The 50% rule of thumb is not a conservative rule.  Its what you can expect over the long term for a portfolio of well managed properties.  It IS NOT a worst case.  The worst case can be much worse.  Owner paid utilities are a potential trouble area that can cause your numbers to be worse than 50%.  Ideally you would work on splitting utilities and converting to tenant paid.  Tenants will be lax with utilities if being careful has no effect on their bottom line.