Does the “expenses side” of the 50% rule include the property tax?
Yes. 50% is for operating expenses…every expense you can think of besides debt service.
The other 50% is for debt service and cash flow.
I prefer the 2% rule myself. Wherein you should get 2% of your total basis back per month in gross rent, at minimum. So if the market allows $1000 a month rent you should spend no more than $50,000 on the property - including all fixup costs. I get those deals all the time , and better even.
If I applied the 50% or 2% rules I’d never be able to make a purchase in my target areas. My goal in REI is a 10% Cash On Cash return for my money. That means I get a 10% annual return on whatever amount of money I put into any property I purchase, before tax benefits are calculated in ((Annual Rent - all operating expenses)/(initial costs + capitol improvements)). That may be too thin for some investors or too rich for others depending on their local markets and personal wants/needs/investment philosophy. Since most of my properties are also in very poor condition when purchased, but in desirable neighborhoods, I also get the added benefit from the sweat equity I put in the property to bring it up to neighborhood standards.
The 2% rule is definitely market specific. In Dallas, or anywhere else in Texas, it will work well. However finding those deals are still hard here … you have to do more direct marketing than browsing the MLS. I bet 80-90% of my properties I found via direct marketing (good old fashioned mailers, LOL). However in Naples (Florida), San Francisco or New York City you couldn’t dream of finding deals that work with the 2% rule. But in most mid-west cities or non-coastal cities where you don’t have a lot of rapid appreciation it seems to work very well.
For me, I also change the 2% rule based on location within the one city I invest in.
For some areas I follow the 3% rule and the south side, I would need 4-5%+.
There’s a neighboring town that I would hop on a 1.75% deal if I could find it.
I know my location is unique to me, but I think the concept is applicable.