All Forum Posts by: Albert Lubin

Hello, Albert Lubin, the 50% rule is a general guideline used by real estate investors to estimate the operating expenses (OpEx) of a property as a percentage of Effective Gross Income (EGI). Effective Gross Income is the total potential rental income minus vacancy and credit loss. The 50% rule states that approximately 50% of EGI will typically be consumed by operating expenses.

While the 50% rule provides a quick estimate, actual expenses can vary widely depending on the property type, location, age, condition, tenant mix, and market conditions.

Here's an example: if a property generates $200,000 in EGI per year, the 50% rule suggests $100,000 would go towards operating expenses like taxes, insurance, utilities, and property management. However, an additional amount should be set aside for CapEx and repairs.

While the 50% rule provides a useful starting point, it’s essential to recognize that it primarily covers operating expenses and not CapEx or repairs. For a more accurate financial projection, factor in these additional expenses separately. Tailor your analysis to the specific property and market conditions to make informed investment decisions. I hope this finds you well!

A lot of the numbers will depend on the location, which state and city. You have to know what the norm's are there. Where I am you would have a sweet deal if you got a cap rate of 7%, $94k per door is a sweet deal. 

You have to be careful with trusting the seller's expenses as it is RARE that they list all of the expenses. And, Property Management is 100%, ALL of the time, NO MATTER what, included in the expenses and NOI. Its not a choice! Its an expense that you may or may not use.

Capex is not a factor in operating costs/NOI. There is not standard as to whether Property management is included in NOI.

 35-40% is a more standard realistic operating cost. 50% is too high.

@Albert Lubin

What's the NOI?

That's between a 6.5% and 7% cap rate. What's the prevailing cap rate for similar assets/same class in the area where it's located?

 Do you have RE representation? A 50% discount from listing price could seem a little unrealistic..but I would not discourage any offer..As for expenses I would request copies of the sellers formal statements or records. If not prior to offer, typically a review of financials is part of income producing property or commercial transactions. Sellers need to provide certain records, as  requested as part of the contract within a due diligence period. If the buyer doesn't like what they find or seller is unable to deliver, the buyer can terminate.