Does the 50% rule apply to high end rentals?

Question

Hi BP,

I'm new to real estate and live in a very expensive part of the country and am trying to find a strategy that works here. My question is, does the 50% rule apply to high end rentals or is there more flexibility since repairs shouldn't cost the same proportionately?

Ex.) Property purchased for $700k, rents for $4500.

Taxes- $6800/yr

The 50% rule would assume $2250/month in expenses or $27,000 a year which seems very high.

Would love any thoughts or feedback.

Thanks,

Grant

Chris Lounsbury · Answer

Hey Grant, my understanding for the 50% rule is its just a rule of thumb.  Meaning some markets may overestimate while others underestimate.  With that being said, the 50% rule is supposed to be a very conservative number.  You never want to fall into the trap of not saving money for expenses that you will surely run into at any given time.

Repairs will differ based on the market as well.  You have to take into account that the quality of work and the quality of products that end up being replaced will most likely be better, meaning more expensive in higher market areas.

Although it may be more difficult to find houses where the numbers work in your area, don't stop looking for the deals.  All it means is you have to network more and make sure you are buying at the right price.  If you're mortgage is lower because you were able to get the house at the right price, with the right terms, that 50% for expenses wont seem so daunting.