Further Question re: 50% Rule

Rehabbing, Fix and Flip, Rental Properties
1

Hello all. I’m a REI newbie who recently stumbled upon this forum. Lots of great info here from helpful posters. I just read the other recent 50% rule thread and while my question was asked by another poster, I don’t think it was answered. So here it is again:

Can someone please break down the 50%? The reason I ask is because some expenses are easy to confirm (e.g. taxes, insurance, water/sewer), whereas others can be fudged by sellers (e.g. repairs, management, capital expenditures). I think it would be helpful to know what percentage of gross rents is typically spent on these expenses that can be fudged.

To give an example, I saw a property advertised this morning for a 6 unit apartment building. Asking price: $334,900. Gross rents: 44k. Taxes: $5,578. Insurance: $1,700. Water/Sewer: $541. Repairs: $368.

Using the 50% rule, NOI = 22k/year and expenses = 22k/year.
Taxes + Insurance + Water/Sewer = $7,819/year.
Thus, other expenses (including repairs) = $14,181/year, or alternatively, = 64% of total expenses.

Like I said, I am a newbie, so I have no idea whether this 64% figure is high, low or about right. That’s why I’m asking experienced investors to weigh in on how they feel the 50% figure breaks down.

In the example above, ~1/3 of the 50% is for taxes, insurance, water/sewer and ~2/3 is for repairs/management/capital expenditures/unforeseen expenses. Is this a typical breakdown? If not, what do you feel is?

Thank you for helping me out.

Scott

p.s. I know that this is a bad investment using Property Manager’s analysis. :slight_smile:

2

that question has been answered many many times…

there is no breakdown. the 50% number is an overall average across the u.s.

In Texas, property taxes are a bigger portion than they are in, say, Indiana.
In NY, cost of materials and labor for fixup is a bigger portion than in Kansas.
The cost of an eviction in Texas is about $300 and done in a few days. In New York, it could cost thousands and take months (while you don’t get rent).

I think you see where this is going…

If you want to back some numbers out of 50%, you can do so on the particular property or location… If you know management is 8%, back it out. If you know taxes are 3.5%, back it out… but you won’t know how much you’re going to spend in a particular year on X issues.

make sense…

3

Thanks for the response.

I understand that 50% is a rough rule that’s true on average across the U.S. But I don’t agree that there is no breakdown, as you say. Just like the 50% rule itself, the breakdown would be one of averages. For example, there is an average tax expenditure, insurance expenditure, repair expense, etc. Whether or not anyone has bothered to research this issue, and calculate the numbers, is a different question. I was asking for anecdotal opinions based on people’s experience. Surely someone who has owned or managed a lot of rental properties might be able to say “on average, taxes account for x%, repairs account for y%, etc.”

Again, I realize this isn’t an exact science and that it depends on the geographic area, type of property and a myriad of other factors. But just as the 50% rule is useful as a rough rule of thumb, any insight that anyone might offer into the breakdown would also be useful as a rule of thumb.

Many thanks,
Scott

4

The 50% rule includes water, sewer, taxes, evictions, repairs, advertising,etc. It does not include mortgage payment (principal & interest).

Hope this is what you were looking for.

5

ScottNY,

Yes, anyone with accurate records could breakdown the numbers for their business, their area, and whatever time frame they own the business. However, that would be meaningless for you, unless you live in the same area (as bdub explained). You could back out the national averages if you would like to by getting the data from one of the national apartment/landlord associations.

In my opinion, that’s pointless because it won’t be right for your area; your timeframe; or your business.

Good Luck,

Mike

6

You absolutely cannot set a number on things like maint. expenses, etc… That’s because each property has different amounts of expenses. Different areas have different labor rates. A 6 unit property will cost more for utilities than a 2 or 4 unit. For each property, you can get pretty accurate estimates on things like utilities, snow removal etc… by simply calling the companies involved and getting an estimate. Since noone has a crystal ball on what will break how much it will cost, you have estimate it somehow. Using the seller’s estimate is not a good idea. So if you set 50% of the gross rents aside for the operating expenses, that should be a good enough answer for you. The breakdown of the 50% will vary from year to year and property to property. But the bottom line ends up to be around 50%. I hope you can see that you’re seeking an answer to a question that has no exact answer. The average is 50% of the gross rents and that’s the best answer you’ll get…