Originally posted by "MikeOH":
Jeff,
The 50% rule is nothing more than the fact that throughout the United States, operating expenses run 45% to 50% of the gross rents for rental properties. Operating expenses include all the expenses that are associated with operating your rental business, but DO NOT include the mortgage payment (Principal and Interest). Operating expenses include (but are not limited to): taxes, insurance, management, maintenance, entity maintenance, advertising, utilities (at least during vacancies), legal fees, damage done by tenants (over the security deposit), vacancies, setouts, lawsuits, and capital expenses (not technically an operating expense).
There is no 2.5% rule. The 2% rule is simply a screening tool that says that you need the monthly gross rents to be about 2% of the acquisition cost of a rental (purchase price + rehab). Very simple math will tell you that if the monthly gross rents are not about 2% of the acquisition cost, the property will not cash flow properly.
Good Luck,
Mike
Mike,
I thought Columbus was potentially a good rental market but after looking at these 2 screening rules, I’m beginning to wonder. For example, here is a typical house that can be found:
Purchase price: $46,000
Gross rent/month: $600 (1.3% of purchase price – way below 2%)
Operating expense: $300
NOI: $300
Mortgage pymt: $306 ($46k, 30 yr., 7%), doesn’t include $82/month for taxes/insurance.
Cash flow: ($6.00)
Under this scenario, I’m guessing this would NOT be a good purchase. Any opinion with this “purchase”
Just so I understand the operating expenses, cash flow etc.
Operating expense= 50% or rent
Using my example above, the $82/month for taxes and insurance would come out of the operating expense bucket of money, thus this would leave me $218/month ($300 minus $82 = $218) to go towards expenses such as new roof, vacancy, marketing etc.
Cash flow =
Rent: $600
minus Operating Expense: ($300)
equal NOI: $300
NOI: $300
minus Mortgage pymt (principal/interest only) ($306)
equals: Cash flow ($6)
Am I viewing cash flow and operating expenses correctly? Thanks again for all your help!
Jim
