Intro and thoughts on 50% rule with Prop 13 in CA

[Chris Mason]

Hello,

Long time lurker, decided to start being active in the BP community.

I'm a lender, of the traditional 'soft money' mortgage sort. 

Investment property purchases are mostly really interesting problems to solve from my POV as a lender. All the extra moving pieces are fun to work on. In particular I also tend to be impressed with the performance of multi-unit properties in my area. Even the sneakiest of sneaky CPAs can't hide that they are often pretty strong money makers when preparing tax returns.

Experienced investors are great clients who appreciate factual statements and don't like BS, which has historically meant that I get along pretty well with them. 

So I started lurking BP to learn about the analysis and thinking that investors do (or should do!) BEFORE the ratified purchase contract hits my desk.

Here's where the "thoughts on 50% rule with prop 13 in CA" comes in.

50% rule: "Over time, 50% of your real estate investment’s income will be spent on expenses, not including the mortgage."

Or, arithmetically:

1. Rental income / 2 - P&I payment = a number.

If "a number" is positive number that you like, take a closer look at the property and run more thorough numbers because you might be onto a good deal.

Intuitively, it makes sense: as rent increases, why wouldn't expenses increase proportionately? If rents go up 10% over a time period, let's be cynical and assume that expenses will find a way to follow. I get it, I like it.

Except that we have one significant expense in CA that cannot go up beyond a certain low amount each year without a full blown amendment to our state constitution: property taxes, thanks to Prop 13.

In California, how do folks account for the fact that one large fixed expense is virtually guaranteed NOT to go up as fast as rents go up when applying the 50% rule? How should they? Prop 13 was rolled out in '78 basically to help long-time-owning grandmas, but has the positive side effect of also greatly benefiting long-time-owning landlords. 

Thanks for your thoughts, 

Chris