When using the 50% rule to evaluate rental properties what expenses are included in the 50%? Are taxes and insurance included in the 50%? Thanks for your help.

I think the main reason BP has the fifty percent rule is that way too many sellers, Realtors, gurus, and other parties interested in ONLY selling quote things like "only 25% expenses". Bigger Pockets is interested in the success of ALL Real Estate investors, whether seller, buyer, flipper, wholesaler, long term holder, etc... One mistake that investors make is that they use fifty percent of the rent collected as their basis. This is incorrect. The fifty percent rule is that you use fifty percent of the "collectable market rent"! For example, if the market rent is $1,000 a month, over time, your expenses will average around $6,000 a year. If you are charging only $800 a month rent, your expenses will still average about $6,000 a year. The other mistake is not counting lost rent as an expense. In the example above, if you are charging the market rent of $1,000 a month but have two months vacancy, you still use the $12,000 as a basis but you also have a $2,000 expense from the vacancy. Using the fifty percent number greatly increases your chance for success.

Nope - not going to have it anymore Paul. If the usual suspects start the usual nonsense, their posts are going to be removed without notice. I'm not in the mood . . .

Agreed! I think we're in agreement... When I said Capital Expenses, I didn't mean rehab expenses to get the property into rental/habitable/marketable condition (though from a tax perspective those definitely are capital expenses)...instead, I meant the Capital Expenses needed to keep the property in that state after you start renting it out. For example, replacing the roof every 20 years or so, replacing the HVAC every 20 years or so, replacing the hot water heater every 10 years or so, etc. A lot of people call these "expenses," but from a tax standpoint, they're classified as capital costs, which is why I call them out separately. But, you're right that I didn't distinguish these from rehab costs, which are also technical Capital Expenses (which I don't believe are part of the 50%). Btw, the calculations I've done in the past have indicated that these types of capital costs should add about 5% to the total cost of holding the property over the long term, so if this isn't part of the 50% rule, you'll probably want to add another 5% to your estimates.

Bryan, excellent website to prove the 50% guideline that BP advocates when analyzing the POTENTIAL for a deal. Although they categorize it differently, it still proves the 50% guideline. Gross Scheduled Rent: $10,812 Other Income: $ 764 TOTAL: $11,576 Expenses: $4,308 Vacancy/Losses/Concessions: $1,482 TOTAL: $5,790 $5,790/$11,576 Within $4.00 of being EXACTLY 50%! Or looking at it another way, the net operating income of $5,786 divided by the Gross Scheduled Income of $11,576 comes out to 49.9% Again, great article!

My take on the 50% rule is that it's *after* you've done your renovations, etc., but it includes my replacement reserves for future capital expenses. The 50% rule, IMHO, does not include initial sunk costs. So, if I buy a house for $30,000, then put $10,000 into it, that's $40,000 all-in, and it has nothing to do with the 50% rule. However, once I rent the property for a market rent of $750 per month, I expect that, over time, my expenses -- exclusive of debt service -- will be 50% of that amount, assuming I use a property manager. That means I am going to spend, on average, over time, $375 per month. To the extent that my cash expenses are less than $375 per month (again, excluding debt service), it would be prudent of me to earmark the balance to some replacement reserve account, assuming that I don't just happen to have a ton of money in the bank to cover the unforeseen. If I were using accrual accounting for my properties, I'd accrue the different between $375 and each month's net expenses and set those funds aside for replacement reserves. I don't mean to speak for him, but I think when J. Scott said capital expenses, he meant a reserve replacement for capital expenses that should be accrued for the future...the roof, the HVAC, and all of those other things that eventually zap you and wipe out a year or two's worth of earnings.

Here is the data: 2010 Survey of Operating Income & Expenses In Rental Apartment Communities Parse, categorize, label, etc. as you wish.

Sure, if you consider your time worth nothing...

The rule of thumb is good for screening. Don't tell that to the worshipers though!

Mike's â€œcollectible market rentâ€ is just the prevailing rent for your type of home in the area. That is, the amount you could rent your property for. You obtain this by doing a rent survey. You do a rent survey by calling property managers, searching Craigslist, local newspapers, driving the area looking at for rent signs, and however else rental properties are advertised in your area. Iâ€™d suggest that since you have a specific property in mind Peter, you do a detailed cash flow analysis by obtaining actual expenses and rents instead of using this rule-of-thumb. It will better define the performance of your investment.

This is not a reference to differences between the rent you're charging and "fair market rent". Expenses should be considered to be 50% of "Gross Potential Rent", which is simply your monthly rental rate * 12. "Collected rent" is less than this due to vacancies and bad debts. That's my interpretation.

What expenses are included in the 50%?What expenses are included in the 50%?

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