There are many ways to determine whether an investment property will make sense long term. I determined very early on that the 50% Rule was the quickest and easiest way to analyze a property.
What Is The 50% Rule For Real Estate Investing?
Simply stated, the 50% rule means that 50% of your rental income will go towards expenses, including, but not limited to:
- Insurance – homeowners insurance and a blanket liability policy
- Major Expense Fund – putting money aside to build a fund for major repairs like new a new roof or HVAC system
- Property Management
- Property Tax
- Repairs – standard repairs including cleaning
- Vacancies – when your home is vacant, you still have to pay to maintain the home, even though no income is coming in
The only expense not included is the debt service, which is the mortgage payment.
For my own personal portfolio, my goal is for each of my unites to cash flow at least $150 per month using the 50% rule
The 50% Rule May Seem Too Simple
I initially thought this myself and I had a really hard time wrapping my head around it. Since I am buying turn key properties with no expected major repairs in the foreseeable future, I am confident that using the 50% rule is a sound strategy.
50% Rule In Action
Lets take a look at my third investment home. The monthly rent is $750 a month, so I should expect $375 per month to go towards expenses. The mortgage on the property is $192.58, so my expected cash flow is $182.42, beating my goal.
Now lets take a look at this investment using known expenses instead of the 50% rule.
- Insurance – $35
- Major Expense Fund – $50
- Property Management – $79
- Property Tax – $35
- Repairs – $50
- Utilities – $50.75
- Vacancies – $75 (10% estimate)
- Total – $374.75
How about that? All of the expenses break down to almost exactly $375 per month. So while I’ll still always look at the known expenses, when I am first looking at a property I always use the 50% rule first to see if it is worth pursuing. Is it going to be hard and true every time? Of course not. Due diligence is always needed.