I want to make sure I completely understand this 50% rule..

[Scott E.]

Hi all,

I have found a duplex that I am prepared to make an offer on. It seems that the #s fit within the rule, but just wanted to make certain. If you guys could maybe take a look at these #s, and also suggest other items that I should be looking at/considering, it would be greatly appreciated.

Preface: The property is a good condition, well maintained, block construction duplex in a VERY rentable neighborhood (walking distance from the state university)

Asking price: $98,000
Units: 2 2br/1bth's
Avg rents for 2br in neighborhood: $700-$750
Property taxes: (annually) $1070
Estimated insurance: (annually) $1000

At full asking price, my PITI/PMI would be apprx $719 per month, depending on the rate (this is with 3.5% down on an FHA loan)

According to the listing, the tenant pays electric, water, sewage, trash. Landlord is only responsible for landscaping.

BTW: I would be living in one of the units myself for the next 6-12 months, so I also would be getting the full interest tax deduction (This will be my first RE purchase)

So this seems to fit the 50% rule, but I know there ARE other expenses.. i.e. property management, landscaping, regular maintanence, vacancies, evictions, etc.

Do these #s seem to make sense? The market out here is VERY aggressive. I've lost out to cash buyers several times already. My realtor is suggesting I offer OVER asking price.

Thoughts?

Thank you,

Scott

[Jon Holdman]

Ignore the 50% rule at your peril. Lots of people claim its irrelevant and can't be correct. But every set of number provided, including a recent very large study posted by Bryan bore out this number. It simply say vacancy, plus capital items, plus operating expenses will be about 50% of the gross scheduled rents.

So, with two units with rents of $700 each, the 50% rule tells you vacancy, capital, and expenses will be about $700. Not every month, and many months or even years will be better. Once in a while you'll have a bad month and you costs will be worse. Every once in a long while (hopefully) you'll have a nasty, messy eviction or a sewer line replacement and your expenses will be much worse. Just plan for it and you'll be fine.

Since you're going to try for OO financing, I'll assume 4.5% for 30 years. That gives you P&I of $496.55. That leaves you $203.45 a month in cash flow. Most people would consider that an acceptable deal. With a more realistic investor loan rate of 5.5%, you're looking at a payment of $556.43, which makes this not such a great deal.

Yes, you'll have some down payment and that will increase your case flow.