50% rule seems extremely arbitrary

[David Schach]

I am very familiar with this rule of thumb, however it seems so misguided and arbitrary and takes into account almost nothing other than a base rental assumption.

Say you've got a 10 unit building and most tenants are drug addicts and are paying below market rents and the property is old and serious repairs are most likely imminent, you are probably looking at 90% of your rent for expenses. Or the reverse could be true, you've got a really nice new 3 unit building with stable well employed tenants all paying at market rents. Your 50% goes down to maybe 20%, maybe even less.

I personally find this rule of thumb so random when trying analyze cash flow on potential rentals. The simple fact that the 50% can move from 100% to 10% depending on a host of variables unique to each particular property makes using this rule kind of pointless in my mind. 

please correct me if i am wrong here.

[Account Closed]

For what it's worth, I tour and underwrite 100s of large multifamily properties around the country each year.

99.9% of the time, I use the 50% rule for my initial back-of-the-envelope analysis to see if the property warrants more time and investigation.

Sure, it's not an exact science and if you have time to run numbers and investigate every deal great, but these guidelines were created by (and for) people who have to make very quick decisions on whether or not a property is worth further investigation.

And funny enough, the company I work for owns over 45 large multifamily properties (~9,000 units).  Our average expense ratio for our entire portfolio is around 49%.