Hi everyone, I just discovered this site a few days ago and have been doing a lot of reading and have learned a LOT. My question is regarding the 50% rule - my understanding is that it is a fairly conservative ratio of operating expenses to rent. Some properties may run at less and some may run higher than 50%.Operating expenses being :
Property taxes
Maintenance
Vacancy
Property management
Advertising, etc.
Capital expenditures.
The operating expenses do not take into account purchase price or mortgage rates, so is this really an accurate tool to use for cash flow?
For example, say there are two similar properties, in two different markets.
Property 1 - 1000 sq ft bungalow, 30 years old, small town
Purchase price $100,000
Rent @ 10% - $10,000 per year
Taxes @ 1% - $1000 per year
Insurance @ 3% - $300 per year
Vacancy @ 8% - $800 per year
Remainder for 50% rule on Capital costs, property management, maintenance etc = $5000-1000-300-800=$2900
Property 2 - 1000 sq ft bungalow, 30 years old, downtown major center
Purchase Price - $500,000
Rent @ 10% - $50,000 per year
Taxes @ 1% - $5,000 per year
Insurance @ 3% - $1500 per year
Vacancy @ 8% - $4000 per year
Remainder for 50% rule on capital costs, property management, maintenance etc = $25,000-5000-1500-4000=$14,500
Capital costs, property management, maintenance etc should be similar for the two properties, should it not? I realize that if you`re in an area with higher property values labor may be higher but not that much higher....right?
I don`t know if there`s such a thing as a property that meets the 50% rule right now...prices would have to drop to pre 2006 levels and rents would have to stay at the current levels for this to occur.
Thoughts?
Property taxes
Maintenance
Vacancy
Property management
Advertising, etc.
Capital expenditures.
The operating expenses do not take into account purchase price or mortgage rates, so is this really an accurate tool to use for cash flow?
For example, say there are two similar properties, in two different markets.
Property 1 - 1000 sq ft bungalow, 30 years old, small town
Purchase price $100,000
Rent @ 10% - $10,000 per year
Taxes @ 1% - $1000 per year
Insurance @ 3% - $300 per year
Vacancy @ 8% - $800 per year
Remainder for 50% rule on Capital costs, property management, maintenance etc = $5000-1000-300-800=$2900
Property 2 - 1000 sq ft bungalow, 30 years old, downtown major center
Purchase Price - $500,000
Rent @ 10% - $50,000 per year
Taxes @ 1% - $5,000 per year
Insurance @ 3% - $1500 per year
Vacancy @ 8% - $4000 per year
Remainder for 50% rule on capital costs, property management, maintenance etc = $25,000-5000-1500-4000=$14,500
Capital costs, property management, maintenance etc should be similar for the two properties, should it not? I realize that if you`re in an area with higher property values labor may be higher but not that much higher....right?
I don`t know if there`s such a thing as a property that meets the 50% rule right now...prices would have to drop to pre 2006 levels and rents would have to stay at the current levels for this to occur.
Thoughts?
