Originally posted by Jon Holdman:
The 50% rule (expenses = 50% of gross scheduled rent, expenses mean actual operating expenses, capital expenses, and vacancy) is discussed in several other recent posts, so I would rather not take up that subject here.
The 2% rule (rent must be 2% of the purchase price) has several assumptions. One is that it tries to get $100 per unit. It assumes SFR type financing (e.g., 30 year note, not 20 year.) For a 30 year, 6%, 100% note, it is exact for a $25,000 unit that rents for $500/month. Expense are $250/month, payment is $150/month, leaving you $100 cash flow. At 7% loan rate, it works for a $30,000 unit that rents for $600/month.
With a 7%, 30 year loan, for a $100,000 house, you only need $1525/month in rent to get the same $100 in cash flow. That's 1.53%.
If you go to cheaper units and lower rents, you need more than 2% to get the same $100. Your rents average $412. Take out 50% for expenses, and you're left with only $206/month NOI. If you want $100 for cash flow, that leaves only $106 for debt service. That will cover about $16,000. That's a rent percentage of almost 2.6%. At 8% and 20 years, you can only cover about $13,000.
Jon! I know you wrote this a while ago but I was researching this 50 2 thing and you just clarified it! Thank you, and just to make sure I am understanding I have a duplex 130K purchase price, loan $800 including insurance and pmi ect. in payments, I get about $1600 rent right now (I know it is not ideal because I am not getting the $100 per door but thus far the place has treated me decently) So I make the 50% rule but not the 2% because I am able to get 50% toward expenses, but not the $200 cash flow in the door. Am I correct on these assumptions?
Here is my question and I think you have posted this before, but if I am doing all of my own repair work then we are closer to 40% or so, and then this IS a positive cash flow property. Granted it still puts me only at the $160 but for my first true real estate investment this is decent?
