The 50% rule is wrong!

[Kirk B]

Or is it just incomplete?

House 1:
Units: 2
Gross Rents: $1,000
NOI: $500
CF: $100*2 units = $200/m
P+i=$300/m
Max Offer @ 7% i = $45,092.27

House 2:
Units: 2
Gross Rents: $1,000
NOI: $500
CF: $100*2 units = $200/m
P+i=$300/m
Max Offer @ 7% i = $45,092.27

They are both fully rented/rentable.

House 1 is a much larger house in a worse neighborhood (think "hood" not "warzone"), and in decent shape. Painted wood or vinyl siding, hardwood floors, decent kitchen and bath, decent moldings, sound structure, and seperate utilities.

House 2 is ugly and in bad shape but in a very nice blue collar area. Crappy asphalt or abestos siding, crooked uneven floors with old hardwoods, baths with 12x12 self adhesive vinyl flooring and claw foot tubs, kitchens with about 5 SF of total countertop space, ok moulding, some walls are paneled over, ceiling height may be low in some areas.

Which house is better?



Long story short: The 50% rule does not adequately address property condition and location. Here is an example: two houses with equal rent, one is in bad neighborhood but good condition, while the other is in a better neighborhood but bad condition. Which house is a better deal? Which would you buy?


I hope that this thread stimulates debate over how to properly incorporate property condition into the 50% rule.