Thoughts on the 50% Rule

[Michael Sokolski]

I posted this in another category but thought I might get more input here. I'm trying to understand the 50% rule.

I've read numerous posts concerning the 50% rule. There are many ideas and opinions on how to figure it. Out of what I've read, this is how I understand it; correct me if I'm wrong.

You figure 50% of the gross scheduled rent. Let’s assume your monthly rent is $1500/Month.

50% of $1500 = $750/Month

Your total expenses should not exceed 50% of gross rent ($750 in this case per month).

Your expenses (not to include your mortgage payments) include:
Maintenance
Property Tax
Insurance
Operating Expenses
Vacancy
Advertising
Tenant screening
Tenant Damage
Legal Fees
CPA Costs
Business Entity costs
Am I forgetting any?

If 50% of the gross rent covers your expenses and the other 50% is more than your monthly Mortgage (principal and interest), it’s a good deal that will cash flow.

Like I said, I’ve read many arguments on the interpretation of this rule so I’d like to hear your thoughts. I know this is not an exact science but is a good starting point in analyzing a potential deal.

I’d be interested in reading some responses to see if I understand it correctly. What other expenses am I missing?