Where can I find a breakdown of the 50% rule for costs involved on a rental property?
Or can any of you that have a few properties give your cost breakdown?
Look online for books called Income and Expense Reports for Apartments.
I think the Urban Land Institute puts out one of these along with a few other organizations.
Try to order them through your local Interlibrary system as they are not cheap.
There is no breakdown of expenses that will work for a given property in a given year. That’s why we use the 50% rule.
For example, how many evictions will you have at 123 Main Street this year? Will a tenant do a huge amount of damage to your property at 234 Ford Drive this year? Will the furnace at 345 Ocean Drive suddenly fail this year and need to be replaced? The 50% number gives you a good average over a period of time. It is IMPOSSIBLE to know what will happen for a given unit in a given year.
Good Luck,
Mike
its just a rule of thumb
as I posted somewhere else recently I have 2 four unit building side by side. My expense ratio was 28% for one and 52% ofr the other. The 28% building had a good year (low vacancy, only a few major repairs, etc). The other one had couple iffy tenants that had to be booted, lots of carpeting to be done, and conitnual parade of expenses, etc.
On a given property, one can easily dtermine things like insurance property taxes, std maintenance like lawnmoving (if provided), but it vacancy and repairs that are truly a wild-card (even for a well run property) and most newbies severely underestimate it.
Its not a bad rule. It might cause you to pass by a few opportunties, but if you want to be conservative, if you find something that meets that criteria, then it will almost certainly not be a loser deal.
Thx guys. I wasn’t looking for numbers for a certain 1 property or for short term. I was more interested in numbers for someone with a larger number of units and their averages over a longer period of time.
Do any of you keep a certain percent of the rents out and put it in a seperate account for maybe vacancy and larger repairs?
Or for other costs?
Thx guys. I wasn't looking for numbers for a certain 1 property or for short term. I was more interested in numbers for someone with a larger number of units and their averages over a longer period of time.
That’s what the 50% number is - an average of the real world expenses from hundreds of thousands of rental units throughout the United States. However, the makeup of that 50% varies from state to state and city to city. For example, here in my little corner of Ohio, the tenant pool is poor. Therefore, our tenant related expenses will be relatively high compared to other areas. People in Texas often complain about their high taxes. Insurance in hurricane prone areas can be very high. Although each of these areas a different mix of relative expenses, the average ends up being 45% to 50% of the gross rents in each area.
Good Luck,
Mike
Over time, I am pretty close to 50%. I put just over half my rent into a savings account for expenses, and it keeps everything covered, but never seems to grow very much.
There will be years without any big expendatures, but then you get a year where nobody stays put, and several vacancies topped off by even one tenant that did a lot of damage before moving, and you’ve got a lot of expense for that year.
There are big expenses that you know occur periodically, and money has to be put away every month for those, too. Otherwise when that new roof is due, or it’s time to replace the furnace, you won’t have the money to pay for it. Even more frequently, you will need paint, both exterior and interior.
“Unexpected” expenses are so regular in occurance that you really should be expecting them and have some money put away to cover them.
in the past I’ve kept a HELOC with a health line of credit open just to smooth out the bumps in cash flow. With some banks freezing those, I just pulled $10k out and stuck it in a money market account. I have over two dozen units so there is always something happening. If you have have one or two units, probably a credit card with a healthy line of credit is sufficent to get you over those months where you have to recarpet/big repairs and have no income at the same time.
Are you including your mortgage payment in the 50%? Are you saying mortgage + expenses should be 50%?
No, the 50% does not include the mortgage payment (P & I). The 50% only includes operating expenses.
Good Luck,
Mike
Mike does it include taxes?
Bax
Bax,
Yes, it does include taxes.
Mike
Thanks Mike,
One more question. Taxes are very high in my area, does that change the 50% rule?
Bax
No, the taxes being high should not change the 50% expenses. The reason is that some other expenses will probably be lower to compensate. For example, as I understand it, Texas has high taxes which is bad. However, that is (at least partially) offset by having excellent eviction laws.
Good Luck,
Mike
what if the 50% rule includes the mortgage and all the expenses? Is that a great place to be in?
Thanks
Ismith2020,
The 50% “rule” simply says that operating expenses run 45% to 50% of the gross rents. By definition, operating expenses do not include the mortgage payment (P&I).
Good Luck,
Mike
Propertymanager,
What % should the mortgage payments be?
You don’t need a percentage to figure what your mortgage payments should be…you can KNOW what they are and will be.
Grab a mortgage calculator off the internet and figure out the numbers, and then add in your extras like maintenance, prop management, etc.