50% rule question

[Chris Pasternak]

Hey guys! Sorry if this is naive but I figured this is the place to ask my "stupid" questions. How often would you say the "50% rule" of expenses applies in real life?

For example, how many years say in 10 years did 50% of your income from a rental property go to expenses?

Thanks much!

[Jon Holdman]

@Elizabeth Colegrove if you're looking at cap rates you're looking at some variation of the 50% rule. Cap rates are based on NOI. The 50% rule is a quick and dirty way to estimate NOI from the gross rents. Nothing more. Sellers often inflate NOI since the combination of NOI and cap rate (for commercial) determines price.

I think cash on cash return is as important as actual cash flow. I can get 10% cash on cash return by making hard money loans. That's less work and less risk than rentals. So, that's about my minimum for buying a rental.

OTOH, I don't want to be dealing with a tenant for just $10 a month, even if that is getting me a 20% cash on cash return.

As to your question, the number your asking about, in gambling terms, is called "variance". "Over the long run" when gambling your returns will match the house edge. But over the short term, it will vary a lot, maybe a lot. IMHO, the 50% rule and rentals (and investing in general) can be analyzed just like a casino game. The 50% rule is a pretty well supported long term result. In the short term, though, your results can vary a lto. On the upside, some months you will collect the full rent and have nothing except taxes and insurance. Other months you'll have a vacancy and a months worth of expenses doing make ready. Other months, like one of mine last summer, you'll have the rent, but you'll also have a $6000 bill to replace the sewer line. Fortunately, most months are the best case. Unfortunately, months that aren't are often much worse.