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Updated about 12 years ago on . Most recent reply

User Stats

60
Posts
1
Votes
Brian W.
  • Peachtree City, GA
1
Votes |
60
Posts

A few questions regarding the 50% rule

Brian W.
  • Peachtree City, GA
Posted

Is simply applying the 50% rule running the numbers? In other words, can I simply calculate what my P&I will be and as long as it's 50% or less of the expected rent, then the deal has potential? Can this replace other, more in depth methods of running the numbers such as calculating the cap rate and CCR?

Also, how does a down payment play into the rule? It seems that in a small down payment scenario, the numbers might not work, but they would work in a higher down payment scenario since the monthly debt service would be lower. Why would the latter higher down payment scenario get the green light, but the former lower down payment scenario get the red light since the down payment is still an expense that comes out of the investor's pocket? It seems like it should play into there somehow, but I'm not sure how since I haven't read anything that mentions where the down payment comes into play with the 50% rule.

Most Popular Reply

User Stats

362
Posts
115
Votes
Tevis Verrett
  • Lender
  • Woodland Hills, CA
115
Votes |
362
Posts
Tevis Verrett
  • Lender
  • Woodland Hills, CA
Replied

A bigtime ditto for what everyone has opined. . .

. . .and here is my further, 0.02:

It is a screening tool, and helps me to ball park what the property is really worth.

I use it as a benchmark against a bloated and ridiculous asking price, as well as lowball cap rates.

Also, I bump it to 55-65% when Im researching distressed and C-level properties, and 40-50% for AAA properties.

Remember we are buying real estate not for the view, or how pretty it is. We are buying for the pure math of passive revenue generation and CASHFLOW.

If you overpay for a property that you dig into your pocket each month to afford. . . it doesnt get better, even with appreciation.

Bottom line:

Use it as a benchmark to answer the question: ". . .will I make money when escrow closes?"

Tevis

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