50% rule

[Bryan P.]

MikeOH and some others talk about this 50% rule. I just bought my first rental property for 22,000. When I add up all of my expenses (tax, insurance, mortgage payment), I come up with 78% expenses compared to gross rents. Your first response might be that I paid too much for the property, but 22,000 was a cheap buy (dont know how I could get a cheaper place) and the rent is 600 which is above average for this area. I don't understand how 50% would work. I would have to be charging 800 rent which seems outrageous.

-Bryan

[Jon Holdman]

First, lets make sure you're calculating that correctly. The "expense" in the 50% include:
1) Actual expenses like insurance, taxes, and maintenance. HOA fees, etc. Fixup in excess of security deposits, any of the usual cleaning or other make-ready work.
2) Vacancy. That is, rent you did not get because the place was empty. Also includes "economic vacancy", which is when you give some a discount or free rent.
3) Capital. Big ticket items like sewers, furnaces, or roofs.

The denominator is the gross scheduled rent. That sounds like $7200 in your case.

It doesn't include:
1) The P&I part of your payment.
2) Anything you spent getting the property ready to rent.

The 50% rule gives a guideline that is about the best you can do. In a really good year, you might have the place rented the entire year and you might have nothing besides taxes and insurance for your expenses. In a really bad year, you could have to replace a roof or have a nasty eviction with a lot of damage and do much, much worse than 50%. Or even worse than 100%.

Finally, the 50% rule doesn't really mean squat for one property in one year. For 20 properties for 10 years, you should come pretty close. For 100 properties for 20 years, you'll be quite close. But for one property for one year, just like five plays on a slot machine, you can be a long ways from the expected results.