Originally posted by "Robert12":
MWarden you make an interesting point. It is often said on this forum that person needs to calculate 45 to 50 percent of monthly gross rents for operating expenses. I assume that is if they bought correctly. For example, if I bought a 200,000 home and rented it for 1,000 a month, whereas, I really should be getting $2,500 a month or more, should I be calculating my operating expenses at $1,250 a month plus?
There is no real answer to that. I have brought up before that the 50% calculation has no real logical basis. If you think about it, there is no real discernible dependence between gross rents (determined by market, location, and certain high-level house features) and operating expenses.
The 50% calculation is a heuristic, meaning it gives a pretty accurate estimate in most cases. It also means it was generated in "reverse", by looking at historical expenses and comparing it to gross rents. In other words, it was derived from data rather than deterministic logic. Google correlation versus causation.
Bottom line, if you have gross rents of $x, the expenses tend to run $.5x. One can try to explain why this is, but in the end that's just the way the data turns out.
The 50% calculation is extremely powerful because it is a simple and reportedly accurate method of quickly analyzing a property. There are plenty of much more precise methods out there, but you lose the simplicity to gain 5% accuracy. And I believe it is MikeOH who made the point that these more complicated methods make it psychologically easier for a person to rationalize a property that is a loser -- and as we've seen here and in countless other threads, that is one thing we don't need! The simplicity of the 50% rule keeps us from sabotaging our own thought process. (I suggest reading "The Logic of Failure" if you are interested in more info about how we're psychologically wired to inevitably ruin our own logical processes.)
