Author Topic: 50% rule for landlords--how does it break down?  (Read 2847 times)

bakeplowsow

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50% rule for landlords--how does it break down?
« on: May 04, 2016, 03:47:54 PM »
Hi MMM community, I've seen a number of posts referencing the 50% rule in being a landlord. (i.e. over the long term, about 50% of your gross rental revenue goes out again in various expenses.) I would love to get an estimated breakdown of the relative magnitudes of small repairs, large repairs, taxes, insurance, property management fees, vacancies, eviction costs, and any other categories I'm missing. Would be super-helpful in better understanding the costs of being a landlord.

Thanks so much!

iamlindoro

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Re: 50% rule for landlords--how does it break down?
« Reply #1 on: May 04, 2016, 04:06:53 PM »
I think attempting to fit expenses to the 50% rule is going about it backwards. The 50% rule is just a quick rule of thumb to determine whether a property merits further investigation.  If it does, you should figure out plausible estimates for actual expenses and evaluate the property based on those.

It's definitely easy to pick a loser where expenses go far beyond 50% of gross rents.  For example, in one market where I own properties, taxes in certain areas of the city may drive overall expenses up to 60-70%, as might water and sewer costs, which are frequently paid by the landlord in this market.  However, just down the road, taxes are significantly lower, and you might be able to lower rents somewhat and get a tenant to agree to pay their own water and sewer.

I'll give you some examples of a property I bought early this year, but understand that they only apply to this specific property in this specific market, being run exactly as I run it.  The average landlord in this area would collect slightly higher rents, but would be responsible for water and sewer, which drives the percentages up.

Rental Income: $16,800

Property Taxes: $2,152
Insurance: $680
Maintenance and repairs (estimated): $1,562
Property Management: $1,562
Annual re-leasing fees: $700
Lease Renewal Fees: $200
Lawn Care: $280
Vacancy Loss: $1,176

Total Expenses: $8,312

Expenses as a % of Rental Income: 49.48%

Again, these numbers are almost certainly irrelevant to you, as expenses will vary from city to city, block to block, and property to property.  You should stop thinking about the 50% rule completely once you start doing an actual analysis on a property.  The only exception to this is if your detailed analysis shows expenses way, way under 50%, in which case you have probably forgotten something, or may have been overly optimistic in your analysis.

SwordGuy

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Re: 50% rule for landlords--how does it break down?
« Reply #2 on: May 04, 2016, 08:33:24 PM »

fishnfool

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Re: 50% rule for landlords--how does it break down?
« Reply #3 on: May 05, 2016, 04:45:11 PM »
All of the above ^^^^ Plus a few unknowns here and there!

I once had to rent a 3 bedroom house for my tenants while the septic was getting repaired. Luckily we got it done in a few weeks and I found them a rental a block away on VRBO for the time the facilities were inoperable.

I once had to hire a exterminator to get rid of a hornets nest in the attic!

So point is you can count on all of the regular expenses but you have to be prepared for a few that catch you by surprise!

The 50% rule is a good conservative approach for most investors to use because you'll have lower cost years and one's that find you pulling out your wallet more often. Landlording is having your cake and eating it too. The equity is the icing on the cake!


clarkfan1979

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Re: 50% rule for landlords--how does it break down?
« Reply #4 on: May 10, 2016, 03:16:18 PM »
All of the above ^^^^ Plus a few unknowns here and there!

I once had to rent a 3 bedroom house for my tenants while the septic was getting repaired. Luckily we got it done in a few weeks and I found them a rental a block away on VRBO for the time the facilities were inoperable.

I once had to hire a exterminator to get rid of a hornets nest in the attic!

So point is you can count on all of the regular expenses but you have to be prepared for a few that catch you by surprise!

The 50% rule is a good conservative approach for most investors to use because you'll have lower cost years and one's that find you pulling out your wallet more often. Landlording is having your cake and eating it too. The equity is the icing on the cake!

I have never heard of a landlord paying to house their tenants somewhere else. I thought the standard procedure was to not charge them for rent if the house was not habitable. Does it vary from state to state?

One of my friends was in a duplex in Arizona and a micro-bust blew the roof off. The repair took 3 months. They didn't have to pay any rent during that time, but the landlord did not pay for any rent during that time. They ended up staying with family.

In reference to the 50% rule, you want your mortgage only to be less than 50% of the rent and separately all expenses to be less than 50% of the rent. I believe that my two rentals below meet the 50% rule. My repairs and capital expenses are low because I lived in each house for at least 4 years and rehabbed the entire house before converting it into a rental.

Rental #1

Single Family Home

Rent: 2,000/month

Mortgage: $760/month
Taxes: $142/month
Insurance: $60/month
Repairs: $100/month
Capital Expenses $100/month
Vacancy: 0
Management Fees: 0 (manage myself)
Lawn Care: 0
Utilities: 0

Mortgage Only: 38%
All other expenses: 20% (excluding a management fee)


Rental #2

Single Family Home

Rent: $1,700/month

Mortgage: $430/month
Mortgage Insurance: $42/month
Taxes: $111/month
Insurance: $74/month
Repairs: $100/month
Capital Expenses $100/month
Vacancy: 0
Management Fees: $142/month
Lawn Care: 0
Utilities: 0

Mortgage only: 25%
All other expenses: 33% (includes a management fee)

fishnfool

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Re: 50% rule for landlords--how does it break down?
« Reply #5 on: May 10, 2016, 05:26:10 PM »
All of the above ^^^^ Plus a few unknowns here and there!

I once had to rent a 3 bedroom house for my tenants while the septic was getting repaired. Luckily we got it done in a few weeks and I found them a rental a block away on VRBO for the time the facilities were inoperable.

I once had to hire a exterminator to get rid of a hornets nest in the attic!

So point is you can count on all of the regular expenses but you have to be prepared for a few that catch you by surprise!

The 50% rule is a good conservative approach for most investors to use because you'll have lower cost years and one's that find you pulling out your wallet more often. Landlording is having your cake and eating it too. The equity is the icing on the cake!

I have never heard of a landlord paying to house their tenants somewhere else. I thought the standard procedure was to not charge them for rent if the house was not habitable. Does it vary from state to state?

One of my friends was in a duplex in Arizona and a micro-bust blew the roof off. The repair took 3 months. They didn't have to pay any rent during that time, but the landlord did not pay for any rent during that time. They ended up staying with family.

In reference to the 50% rule, you want your mortgage only to be less than 50% of the rent and separately all expenses to be less than 50% of the rent. I believe that my two rentals below meet the 50% rule. My repairs and capital expenses are low because I lived in each house for at least 4 years and rehabbed the entire house before converting it into a rental.

Rental #1

Single Family Home

Rent: 2,000/month

Mortgage: $760/month
Taxes: $142/month
Insurance: $60/month
Repairs: $100/month
Capital Expenses $100/month
Vacancy: 0
Management Fees: 0 (manage myself)
Lawn Care: 0
Utilities: 0

Mortgage Only: 38%
All other expenses: 20% (excluding a management fee)


Rental #2

Single Family Home

Rent: $1,700/month

Mortgage: $430/month
Mortgage Insurance: $42/month
Taxes: $111/month
Insurance: $74/month
Repairs: $100/month
Capital Expenses $100/month
Vacancy: 0
Management Fees: $142/month
Lawn Care: 0
Utilities: 0

Mortgage only: 25%
All other expenses: 33% (includes a management fee)

Under the circumstances it seemed like the right thing to do. The tenants could not shower, use toilets etc etc.

Aloha

electriceagle

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Re: 50% rule for landlords--how does it break down?
« Reply #6 on: May 15, 2016, 07:46:15 PM »
Hi MMM community, I've seen a number of posts referencing the 50% rule in being a landlord. (i.e. over the long term, about 50% of your gross rental revenue goes out again in various expenses.) I would love to get an estimated breakdown of the relative magnitudes of small repairs, large repairs, taxes, insurance, property management fees, vacancies, eviction costs, and any other categories I'm missing. Would be super-helpful in better understanding the costs of being a landlord.

Thanks so much!

Its a rough approximation and not intended for every market.

Imagine a 3 bedroom, 2 bathroom house in the midwest. It sells for $75,000 and rents for $1000/mo.

Now imagine that you take that house, put it on the back of a truck and move it to San Francisco. Now, it sells for $1MM and rents for $7,000/mo.

Although the rent went up by 600%, the cost of maintaining the property did not go up by the same margin. In fact, it probably went down because the house is now in a location without bad weather or heating costs.

The actual house that you are considering could fall anywhere along the cheap-midwest / expensive-california spectrum.