All Forum Posts by: Michael Rossi

That is ABSOLUTELY WRONG! Post the numbers! Provide a link! I just read one of the NAA studies last night AND YOU ARE WRONG! When capital expenses are included (as is with the case in the 50% Rule, the expenses are 45% to 50%. You don't even need to read the entire survey to determine that - it's in the executive summary in the first few paragraphs. In addition, Taz's study of 30,000+ units showed the expenses in every rent category in the range of 45% to 50%! Finally, EVERY SINGLE PERSON that has claimed otherwise here and has produced data has been proven wrong. Post the numbers!

It's absolutely true that cap expenses are not technically an operating expense - AS I'VE SAID HUNDREDS OF TIMES BEFORE! However, for the purpose of the 50% Rule, they ARE included, whether you approve or not.

Agreed, as I've also said HUNDREDS OF TIMES! Speculation is a valid business model.

Who are you arguing with? I agree that speculation is a valid business plan (again - as I've said hundreds of times before).

I don't know J Scott. I don't see how Mike M could agree with me that the expenses are 45% to 50% and then accuse me of having an agenda to make sure that investors, especially newbies, overestimate their expenses. That just doesn't make sense. If he agrees that the actual expenses are 45% to 50% (and he admitted that his are), then it seems to me that my agenda is to ensure that investors, especially newbies, understand the REAL expenses as opposed to over-estimating them.

Would you care to explain how these two statements make sense. You've admitted several times now that your own personal portfolio has expenses that average about 50% (including just yesterday in another thread). You then post that actuarial facts PROVE that expenses are 45% to 50%. Then you say that I have an agenda to see that noobies overestimate their expenses, when I'm saying that expenses are 45% to 50%! That sounds like doubletalk to me!

J Scott,

I'm not trying to be argumentative, I'm trying to be accurate. I can NOT agree with things that I know are false because the financial lives of newbies lie in the balance. What we say here DOES MATTER.

For example, we've had people on here (many claiming to be experienced investors) who have claimed that the expenses were ITI (interest, taxes, and insurance), 25%, 30%, 35%, 40%, 45% and everything in between. Should I, in the interest of being agreeable, nod my head and agree that expenses are limited to ITI, 30%, 35%, etc? NO! The real world data shows that operating expenses over a large number of units and/or a long time period are 45% to 50% (The 50% Rule). That is the number that matters if you're running a rental business. Whether or not anyone follows the 50% Rule is their decision, but I won't pretend that I believe something else just to get along.

I agree and that is because the vast majority of SFHs are owned by mom and pop owners who didn't understand the operating expenses when they bought the property. A person can certainly have a positive cash flow with SFHs if they properly evaluate property before they buy and purchase at the right price.

I don't agree. I own both and I don't find getting real world cash flow to be more difficult in one or the other. The key is to understand the operating expenses and BUY AT THE RIGHT PRICE - regardless of the number of units.

There isn't anything to "pass" with the 50% Rule. The 50% Rule simply says that over a large number of rentals and/or a long time period, expenses will be 45% to 50% of the gross rents. That's all it says.



Again, I do agree that everyone needs to do due diligence! However, I STRONGLY disagree that you don't know what the OE will be. Over a large number of units and/or a long period of time, the OE will be 45% to 50%. That is absolutely backed up by REAL WORLD DATA.

Here is EXACTLY how I evaluate a property that I'm considering purchasing from a numbers standpoint (assuming all the rest of the due diligence is acceptable).

I take the gross rents that I KNOW I will charge (irrespective of what the current owner is charging). I subtract 50% of that amount for OE. I subtract $100/unit/month which is my cash flow. What's left is the max mortgage payment (fully amortizing) and that will allow me to derive the max purchase price before rehab/carrying costs, etc.

From that max purchase price, I subtract the cost of the initial rehab and any carrying costs that it will take to get the property up to speed. That is the maximum price I will pay for the property.

RIDICULOUS! Almost every rule has exceptions.

The 50% Rule doesn't say ANYTHING about the value of a property - NOTHING! The 50% Rule simply says that over a long period of time and/or a large number of rentals - the operating expenses (including vacancy and capital expenses) will run 45% to 50% of the gross rents. That's it.

Who talks that way? I don't "underwrite transactions" - I am NOT a loan officer or bank employee! I do evaluate properties that I'm thinking about buying, but I definitely do NOT "underwrite transactions".

Semantics aside, as I've said MANY times before, I agree 100% that a person should do proper due diligence.

That vast majority of the newbies on BP are buying SFHs or very small multis. Unfortunately, the vast majority of owners of SFHs and small multis don't have a clue as to their operating expenses and certainly don't have them down on paper. It is IMPOSSIBLE to use actual data to evaluate most of these properties because the actual data doesn't exist!

EXACTLY!

I agree Brian. If you buy a rental where the rents are mispriced, the expenses will be off. Then, if you buy the property and correct the rents, the expenses will once again fit the 50% Rule (over a number or units and/or a long period of time). The same is true of buying a property that is mismanaged. Once you fix the management, your expenses should once again fall within the 50% Rule.

I also agree with you that you should do due diligence for every purchase and study how the property operates.

No, Brian, I'm not trying to pick a fight with you and I haven't underwritten a single loan. I'm not a loan officer - I am in the rental property business.



I don't buy "dilapidated" buildings, but not because it would be an insult to do so, as you seem to be insinuating. I don't buy dilapidated buildings because I don't like to do major rehabs. As for living in Sticksville - guilty! Ohio is indeed Sticksville, but then again, so is Texas!



WRONG AGAIN! If you use the NAA data to calculate the expenses the same way I do the 50% Rule, you'll find the expenses are in the 45% to 50% range - not 45% plus or minus 2%. I suggest you read one of the sticky threads on the 50% Rule.



You're right, I have made it my mission to try to educate newbies on the REALITY of expenses. There are dozens of gurus out there claiming that the expenses are lower for their own selfish purposes. In addition, there are thousands of other pretenders out there that are also claiming lower expenses. I stand by my 50% Rule numbers. They have been proven accurate over and over. Taz's study of 30,000+ rentals proved it accurate. In addition, every single person that has claimed otherwise on BP that has had data has been proven wrong.



That is often caused by terrible management. In my experience, these complexes are VERY inefficient and often are big money losers!

New scientific data shows that renters have the smallest brains of any creatures on earth. Their brains can only hold 5 minutes of short term memory and absolutely no long term memory. That's why when the tenant tells you that the'll be there on Saturday, they never show up - they simply couldn't remember anything that far in the future.

Therefore, if you don't want to have a bunch of no-shows, you've got to observe the 5 Minute Rule, meaning that you must talk to an applicant within 5 minutes of them leaving to see your rental. So, when I show a rental, I make the tenant call me 15 minutes before the appointment, so that they'll have to leave within 5 minutes of me talking to them. Once they're on the road, they usually can remember where they're going, so you're ok even if it takes them more than 5 minutes to actually drive to your rental. Following this procedure has cut my no-shows to almost zero.