50% Rule- Is it Really a Rule?

[Emily Sulliban]

I've been reading on the 50% rule for calculating viability on a potential rental income property:
Gross monthly rent
-(minus)50% for operating expenses
______________________________(equals)
NOI(Net Operating Income)
-(minus)mortgage payment
______________________________(equals)
Cash flow (positive or negative)

My question is: Does the 50% rule ever become.. the 65% rule? Or is the 50% rule an actual rule and it's safe to assume that operating expenses will always stay at 50% or less?

Are there any landlords that can tell me all of their actual operating expenses (other than loan/mortgage payments)? I understand utilities, taxes, and landlord insurance.. the solid monthly fees that I know will come every month. The other fees, such as maintenance, legal fees, and eviction costs don't seem like solid monthly expenses... does the 50% rule account for these fees that will eventually pop up, but at an incalculable point in time?

Thanks,
Emily

[Mitch Kronowit]

Originally posted by Jon Holdman:

I will give you an "anti-rule".

Cash flow = Rent - PITI

I see this one used on a daily basis. Every deal some wholesaler shows me uses this rule to claim "it cash flows".

Ok, simply in the interest of clearing some things up:

Speaking strictly from an accounting perspective, the "cash-flow" of a property on any given month is the rent check minus any checks YOU write. For example, imagine a house you manage yourself rents for $1,000/month with a mortgage (P&I only, non-escrowed) of $600. Not bad for a few months, right? The cash-flow is INDEED $400 a month, i.e., you received a rent check for $1,000 and only wrote one, to the lender, for $600. So for this month, cash-flow WAS Rent minus P&I.

However, what happens when the tax bill installment of $1,200 comes in? Wow, super cash-flow negative that month ($1,000 - $600 - $1,200 = - $800)!!! And a few months later, dang, a water pipe bursts and there is no such thing as a cheap plumber. Next year, a two-month vacancy. (This is why reserves are SOOOO important!)

So, what "newbies" should understand is this 50% "rule" amortizes those BIG expenses over the long-term to come up with an "average" operating cost for the property in order to compute an average monthly cash-flow. IOW, a property that "cash-flows" most of the year actually may not be profitable to own!