All Forum Posts by: John Soforic

Single pane cheap fix, is about what it looks like.  

I have a daughter who trusts that her dad is not an idiot since I own 46 units, and so she asked me if the plexiglass window in her Chicago rental apartment is legal... I, not wanting to disappoint said daughter, am cheating by asking those more knowledgeable than I.  Does anyone have an answer.  I live 500 miles from her.

I still cannot believe this mistake I made two weeks ago.  A guy did three roofs for me over the past year, so I had him bid another.  He bid it right, and I gave him 3000 down- and never heard from him again in the past two weeks!  He's licensed and insured.  Won;t return texts or calls.  I think he's gone to Mexico!!!  And so then I did a google search and his name is at the top of the list of rip off artists in my area.  Now I am calling my buddy who is a lawyer, to get this guy for theft of $3000!  I never pay upfront- NEVER.  Until two weeks ago, and I know better.

@Ophelia Nicholson, @Brett Russell @Duncan Taylor @Chris Martin @Jeremy D. @Justin Pierce @Jeff Greenberg @Matt Devincenzo @Sharon Tzib @James Syed @J Scott @Gerald K. @Will Barnard @Fran Flanagan @Joshua Dorkin

To all who helped me dig deeper... I've been deep in the books during the past week since this thread was discussed and disected. And, low and behold, I am now a new convert to the rule of 50 percent. In the end...

My rental expenses totaled 39 percent of rent collections for the past three years, which is in line with the 50% rule since I self-manage (which adds another 10-12 percent, not too mention the increased costs involved with absentee management). So if I hired out management, I'd be over 50 percent gross.

In the end, I just want to answer all of you who took the time to respond to this thread, who disagreed with my assertions, and who made me better for it. That is an awesome service to me. Thank you for your time.

I have just returned home from work, and am overwhelmed by the many responses. Had I realized this post would generate so much debate, I may have been more cautious in the numbers I used for my initial question. As it is, I hear the power of BiggerPockets loud and clear! Very impressive bunch (IMHO) and it is evident that this group has experience in these real estate. It is also evident that the overwhelming majority believes that given the averages, the 50 percent rule will eventually win the day. I will eat humble pie and dig deeper to see if I may in fact be understating my true expenses per property.

Ophelia Nicholson, Brett Russell, Duncan Taylor, Chris Martin, Jeremy D., Justin Pierce, Jeff Greenberg, Matt Devincenzo, Sharon Tzib, James Syed, J Scott, Gerald K., Will Barnard, Fran Flanagan

Not arguing with you, Chris. Recall that I am the one who asked the question, so I will respond humbly... I value your questions.

I can tell you my repairs for last year were less than 1 percent of gross profit, and I don't want to hear about deferred maintenance. I know all about it. I can also tell you that my vacancy rate is always extremely low- nowhere near 5 percent. I can tell you also, due to high quality units and tenants, I almost always show and rent my units during the last month of the exiting tenant (zero vacancy, little painting). In my humble opinion, when an investor has a fleet of rentals, all performing as expected, it's like a convoy of ships cruising across the ocean. Yes, occasionally a ship gets in trouble and needs money thrown its way. But the rest of the fleet are cruising and helping to pay for the injured ship, and the injured ship is a rarity.

My only question here, is whether it is possible for the 50 percent rule to vary greatly due to locality. And I will look into the numbers more closely.. I thank you for the input. But I can assure you that the above example of a typical rental is not out of a fiction novel.

Chris,

Nice response. I need to run to go to work, but I will have time to crunch these numbers later. It will not be too difficult. My initial thought is that allocating $1000 per year for "repairs" does serve (for me) as a bucket for many of the aforementioned costs, but if I was sure I wouldn't have started this thread, right? I know my gross and my net, and you make a very good point to validate the real facts.

Brett,

I think you meant to say "net profit <after> taxes and insurance" not <before>.

You are right on. My fault.

My example above includes taxes and insurance, and so do my real numbers. To be clear, when I say I am the property manager, my rule is to not engage in the labor. I hire it out, write up the punch lists, review the work... all of which takes time. But no painting for me. At least, I TRY no to do any work.

In reviewing past threads, I admit being sent into a mild panic over this 50% percent rule of thumb, despite the fact that I am experienced and currently own and operate 41 units... single family and duplexes with one 4-unit. I am an absolute number crunching geek, and while my truck may get messy my accounting is spotless and meticulous. So my point is I know my numbers, track every dime collected and spent on Quickbooks, impose the numbers onto another Excel graph, etc. You get the idea.

Am I correct in assuming we are dealing with a general rule of thumb that applies to the entire country, and as such it may be a broad generality with wide variability? I question whether it applies to Small Town, rural America. The facts are that in my area, taxes are lower, the cost of housing is lower (thus cost of insurance), and I do not hire property management. These local facts lower my overall percent of expenses which end up looking like this...

A common duplex rents for 550 each side (tenants pay utilities)

+13,200 gross rent

-1000 repairs per year (every five years = a $5000 bomb hits the property!)

- 2000 annual taxes

- 500 insurance

- $600 vacancy (5%)

= 9100 net profit before taxes and insurance

So in this example, which is accurate reality in my accounting world, my expenses are 31 percent- not close to 50%. Am I missing something? Or is it just that I can cash flow higher because I live in a rural area with no real appreciation? Even with 10% property management fees my operating expenses would be 41 percent... and I suspect more trouble on the rental side which may account for added expenses.

To be clear, I am not bashing the 50% rule. Why NOT estimate high on expenses?

I love conservative rules that keep me from hurting myself. Real estate to me is a chess game in which one needs to be on the lookout for trouble in all forms. I believe it is a valuable general rule of thumb to keep an investor safe; i.e., it provides a margin of safety. If I misunderstand the concept, please advise. Maybe it's property management that is costing others so much, and adding to the expenses? The purpose of thread is just to clarify it all.