Is 50% rule for multi-family really conservative?

Question

Start analyzing the deals of multi-family,for the 50% expense rule,I really think it might not so conservative as a lot guys think about.

Some of the deals I am going through it might close to 60%,does 50% really conservative?

What do you use for the expence part?

Thank you for any inputs,thank you.

Brandon Sturgill · Answer

Not conservative. Accurate.

Seth Borman · Answer

If you look at the numbers for large apartment operators they use 40-48% depending on different factors. The biggest factor is who pays utilities. If the tenant pays then the number is usually around 40-44%.Of course, that includes all classes of apartments all over the country and smaller units will have different numbers depending on how you manage them. If you manage them yourself that line item is good for you because its coming right back to you.

Daniel G. · Answer

I would go somewhere between 55-60% for Operating Expenses and add a line-item called "non-routine" in which you use a dollar amount on a per-unit basis. For example $600 X (number of units). Always, always do non-routine and make sure you adjust taxes somewhere around 75-80% of purchase price. This should help paint a more realistic picture.

Daniel Holtz · Answer

Hello Vincent,

It will depend on your area and what type of deals that you are looking at.  Typically the numbers that go into it will include 10% vacancy, 10% cap ex, 10% repairs, and 10% management fees.  Make sure you are doing all of these numbers as they are important in the bigger picture.  If you are handling things like the management of the properties, you will still want to include this in your calculation because it will make your numbers more realistic if you ever go to sell and are trying to market to a buyer/investor.

Is 50% rule for multi-family really conservative?

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