Usually, in an area where a particular expense is high, it will be offset by other expenses which are low. For example, Texas might have high taxes, but a very efficient eviction procedure.
In this case, if these are real numbers, then yes I think you would need to use a number higher than 50% for the operating expenses. Certainly, $67.50 is not enough left over for managment, maintenance, advertising, legal fees, evictions, utilities pd by owner,etc, etc, etc.
With the mortgage payment you listed, this appears to only be about a $20,000 purchase price for the property. Assuming that you bought it at 50% of market value, that would mean this is a $40,000 (market value) property. Having property taxes of $170 per month on a $40,000 property seems EXTREME. In my area, a $40,000 property would have property taxes of about $35-40 per month. The taxes on this example property are over 4 times higher than that! Have you checked with the county auditor (or tax authority) to see if this tax number is correct. Something doesn’t seem quite right. Maybe the county/city as incorrectly appraised this property.
Assessor’s value on these two properties is $28k,$30k and at retail they probably would go for around $35k-40k. They are currently rented, so that is good.
But yes, the taxes are right. Our county is so screwed up in these lower income areas it’s disgusting. The taxes on these houses are so high that it makes it hard to cash flow - some properties are higher than those but then occasionally you find ones priced decently. It makes NO sense at all that a property assessed at $26k has taxes of $2k, but if half the city is like that, then there’s not alot you can do about it.
I know they still cashflow at $100 per month even taking a higher figure for expenses, but they should be cashflowing twice that if not for the taxes.
So I take it the concensus is to just estimate a higher figure for operating expenses?
Wow. Those are some high taxes for the values. In my area, higher taxes are in areas where the rents would be higher. I would imagine the high taxes would force you to use like a 70%-30% rule! Is it hard to find deals that cashflow? I can see where it would.
I’ve been thinking alot about this 50-50 rule… I like it, but I think we need to remember it is a rule of thumb and obviuosly can be adjusted for your personal reality…
Mike correct me if I’m wrong, but the 50/50 rule gives you a “red line” as an investor - meaning, if it passes the 50/50 rule, it;s a good buy and you can possibly have an even higher cashflow if your lucky, but if at 50/50 (worst case scenario) the property flows positive, then you;ve got something …
so I adjust the rule to my scenario – I manage the properties myself, and lbuy where there is high tax millage - so I do 35/65 and move taxes into the mortgage side…
So 35% of my rents are expenses, which leaves me 65% for Debt service, Taxes and then profit …
It’s called the 50% Rule (Phlemboy is the only one that calls it the 50/50 rule) and there isn’t anything to “pass” with the 50% rule. The 50% rule simply states that throughout the United States, operating expense run 45% to 50% of the gross rents. That’s it - nothing to “pass”. 50% is not the worst case scenario, 45% to 50% is the average over time if you do things right. You could certainly have expenses well over 100% of the gross rents for any given time period.
There is no “adjusting the rule to your scenario”. The expenses will be what they will be. If you disregard the management expense or the maintenance or the damage done by tenants above the deposit or the advertising, etc, etc, etc, the expenses will still exist and they will be paid (or you will be out of business).
Taxes are not debt service. Insurance is not debt service. You can call them that, but it doesn’t change the math. It also doesn’t matter where you live, the math is still the same.