There are various rules or equations in real estate that can be used to help a person quickly figure out a potential real estate investment’s profit value. The 50% rule is one of those rules. It is used to quickly estimate the possible cash flow of a rental property. It aims to determine the potential income of a rental property by estimating that 50% of the gross income will be allocated toward the property’s operating expenses.
The 50% rule for real estate states that on an average, the expenses for any buy and hold rental property should not exceed 50% of the rent. Those expenses would include expenses such as maintenance and repair, property management fees, your vacancy, and turnovers and many more. Be aware that this figure will not include any type of mortgage, loan payments or HOA fees for the property.
As a rough estimate the numbers on your rental, expenses will break down, something like this:
– 5% on maintenance and repair
– 10% on capital expenditures
– 10% on property management
– 10% on property taxes
– 5% on insurance
– 10% on vacancy and turnovers
Your percent’s will vary, on every property that you look at. The important part is to make sure you account for every expense that each rental has. If you can calculate all the possible costs from the property, your 50 % rule will give you a more accurate value which will allow you to determine the potential of the property.
It is perfectly fine to use an educated estimate on these numbers since over the long-term it tends to even out. So, if all your expenses added up to 50% or less of the possible rent, you would then have the remaining 50% for profit, to pay the mortgage, and HOA fees.
The 50% rule/formula can be used as a starting point to determine if a real estate investment would be a good rental property. If these numbers look good, you can continue to investigate and learn more about the property and the neighborhood such as if taxes are projected to rise, school districts, how the rentals in the area are performing, and the possible repairs the property may need in the future (such as new roof).
Remember the 50% rule is just a starting point. You must do all of your due diligences on every one of your prospective rentals.
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