Who does not use the 50% rule?

[Levi Gale]

Hello,
Who here does not follow the 50% rule when analyzing/purchasing a property for long term hold? There are a few reasons I can see someone not using it i.e. they are relying on appreciation (not my cup of tea), they look forward to equity build up and loan payoff, or maybe they are seasoned investors that know their maintenance and management keeps at a certain percentage.

I am in Arizona a market that dropped significantly since the boom, and I'm starting to think some investors are buying at FMV simply because they expect appreciation. I don't view it as a wise investment, but hell I could be wrong. I view this as the type of speculation that had everybody and their grandmother buying during the boom. Am I wrong here?

[Will Barnard]

Originally posted by L Gale:

Hello,
Who here does not follow the 50% rule when analyzing/purchasing a property for long term hold? There are a few reasons I can see someone not using it i.e. they are relying on appreciation (not my cup of tea), they look forward to equity build up and loan payoff, or maybe they are seasoned investors that know their maintenance and management keeps at a certain percentage.

Regardless if you are relying on appreciation or not, that does not remove the expenses. All the 50% rule says is that on average, you can expect to have 50% of your gross rents go to expenses. If you find that other investors are paying prices higher than what you should to get a $100 per door in cash flow after applying the 50% rule, then you must assume that they are either ignorant or have an alternative strategy other than cash flow, not that the 50% rule is thus gone. It will remain over the long haul on most investments, especially those where the gross income is $1000 per month or less.
Looking forward to equity build-up and loan pay-off also has nothing to do with the 50% rule.

Here is what you must decide as an individual investor: Are you willing to buy with limited or even negative cash flow for the long-term appreciation and ammortization play? If so, go fo it. If you are trying to build cash flow to live off, then your stratgey can not be the appreciation game, it must be the cash flow game and if so, you would be less wise to ignore the50% rule of thumb.