50% Rule on a quadplex with 20% down.

[Elliot Mendoza]

So I've been reading the boards for a while, I am currently deployed and I refined an excel spreadsheet I had worked up before I left the states.

As of right now these are the numbers I'm looking at, and I -THINK- I have the 50% rule and 2% rent thumb rules down for the most part.

So here's my analysis:
Asking Price: Brand new quad(built dec 2012) 330k
20% down = 66k
4% interest loan, 30yrs: 1,260.38
Taxes: 583 monthly
Insurance (Allstate gave me the best quote): 72 monthly
PM: Century 21 - 1/2 months rent to fill vacancy + 10% monthly
All 4 units rent at 825: Gross rent monthly: 3,300
All closing costs payed for by builder.

So those are the base numbers, now based off the 50% Rule:
19,800 Yearly NOI
14,717 Yearly Debt Serivce (Princicple & Interest payments)
5,083 Yearly income left over, about $105 per door monthly.

Actual rent is only 1% at current rental value's (3.3k monthly)

So do I do my COC based off the 50% rule income? Then it would be 7.7% COC return per year.

So are my calculations correct? And to -me- this seems like a good deal as such. Any input would be appreciated. I have this all worked out on an excel spreadsheet and will continue polishing it up as need be to make it near dummy proof for myself.

Thanks in advance :)

[Jon Holdman]

While I don't disagree with Ben Leybovich about calculating a cap rate, its VERY dependent on an ESTIMATE of NOI. The 50% rule is simply a way to estimate NOI. The 50% rule says that 50% of your gross scheduled rent will go toward capital, expenses, and vacancy. Its been shown to be a good estimate for a large number of units over many years. It won't be accurate for any particular unit in any particular year. You may have good years with nothing but taxes and insurance and rent collected every month. You you may have a bad year where you have a large expense. The 50% rule is NOT a conservative rule. If you manage your property well, get good tenants, and do reasonable maintenance on the property, you will hit that number. If you're sloppy with tenants and the building, you can do much worse.

Note that the 50% rule does include property management. Around here, that's 10% of collected rents plus about half a month's rent to fill a vacancy. At one vacancy per year, that works out to 14% of that 50%. In other words, if you manage yourself, you could use 36% instead of 50%. But do realize you're "buying a job" if you do the math like that.

The trouble with trying to identify every possible expense, line by line, and putting a number on those is that its easy to slice the tomato too thin. You think "naw, that's too much for maintenance, let me drop that a little". You do that to all the lines in your analysis and the property looks OK. But you're using a total number like 25% or 30% for the expense, vacancy and capital total, and experience shows (and several large studies that have been posted in the past) that's just not realistic.

Realize too that any estimate is just an estimate. The actually numbers will be determined in the future. Those will be whatever they turn out to be. The 50% rule is just a way to be a little more conservative in doing the initial estimate. Its not a guarantee of your actual results, good or bad.