Adjustment to 50% Rule

[Ryan B.]

It seems as if a large number of buy and hold investors try to use the 50% rule for their rental properties. I myself think the rule makes perfect sense and that is what I use also.

I would like to get everyone's opinion on if I should make an adjustment to the 50% rule since I personally do all the maintenance and management of my rentals (these are then not coming out of the 50% for expenses, except for materials on repairs). Part of me says I should maybe adjust it down by 10%-15% or so, but the other part of me wants to be conservative and not count the extra as cashflow.

I would love to know if anyone else adjusts this ratio when they do the management and maintence themselves. Thanks for the input.

[Mike McKinzie]

As I have posted before, expenses are never a product of the rent collected. In other words, you can't lower the rent to lower your expenses. Next, a $500 water heater is a $500 water heater whether your rent is $500 or $2,500 a month. Next, if you buy a house for $100,000 in OK, your property tax is about $1,000 a year but if you buy a house for $100,000 in Texas, your property tax is about $3,000 a year. Both houses will rent for $1,000 to $1,100 a month.

While the 50% guideline is a great tool, the higher the rent goes, the lower your percentage should be. My houses that rent for more than $2,000 a month run about 40% in expenses. I have a friend who has a house that rents for $10,000 a month, there is no way his expenses are $60,000 a year.