Rule of Thumb: The 50% Rule

The 50% rule is a rule of thumb to do a very-quick first-pass analysis of a single family investment (rental) property. The rule states that — on average — the total expenses associated with operating a SFH investment will be about 50% of the gross rents. The expenses included in the 50% are things like: taxes, insurance, repairs, property management, administrative, legal, turn-over costs, eviction costs, etc. Basically all the ongoing annual expenses associated with maintaining the investment.

Here’s an example of how the 50% rule can be used:

Let’s say you find a single family property for sale for $100,000. Additionally, let’s say that based on your research of the local market, you believe you can rent the property for $1000/month. Using the 50% rule for a first-pass financial analysis, we find that all operating expenses would total about $500/month:

Expenses = Gross Rents * 50% = $1000 * .5 = $500

So, the amount you have left over at the end of the month to pay your mortgage and your profit (also known as you Net Operating Income, or NOI) is $500:

NOI = Gross Rents – Expenses = $1000 – $500 = $500

Now, let’s assume you would get 20% down, 30-year fixed interest mortgage at 6% on this property. Your monthly mortgage payment would be $480, leaving you $20/month in profit:

Profit = NOI – Mortgage = $500 – $480 = $20

So, your very preliminary analysis indicates that you can get a small positive cash flow from the property with a 20% down payment. $20 per month isn’t much to get excited about, but consider that if you can negotiate the price down (thereby lowering your monthly payment), this might be a worthwhile deal. For example, if you can negotiate the price down to $85,000, your monthly payment drops to $408/month, leaving you nearly $100/month in profit.

Also, remember that property management costs are factored into the 50% expenses, so if you plan to manage the property yourself, all fees that otherwise would have gone for property management will now go to you.

As always, don’t trust rules of thumb to make your decisions for you, but don’t hesitate to use them for “back-of-the-napkin” assessments of whether a property might be worth looking into further. The 50% rule is great for that!

9 thoughts on “Rule of Thumb: The 50% Rule”

  1. Your blog is awesome; thanks for continuing to share your information openly. Been reading over your blog for a few hours now, absorbing and taking things in.

    1. Hi GTG,

      I actually know several investors in El Paso who consider the 50% Rule gospel. Im sorry if it hasnt worked for you. If I can ever help you with your investing, dont hesitate to reach out to me.

  2. What is the formula you used to get this so i can use it off hand:

    Now, let’s assume you would get 20% down, 30-year fixed interest mortgage at 6% on this property. Your monthly mortgage payment would be $480, leaving you $20/month in profit:

  3. If taxes and insurance are part of the mortgage youre essentially deducting taxes and insurance twice from your cash flow in this example.

    1. Hi Anon,

      I never count taxes and insurance as part of the mortgage — the mortgage calculator simply determines principle and interest. Taxes and insurance are counted separately.

  4. J Scott, should the 50% rule include the vacancy number or does vacancy need to be deducted from the Potential Rental Income and the 50% rule applies to the Effective Rental Income?

    I.e., $1000 rent minus $50 vacancy (5%) = $950 / 2 = $475 for 50% rule?

    1. Hey David –

      50% typically applies to expenses, CapEx and rent loss, where vacancy is included in rent loss. So, on $1000 market rent, the assumed net income would be $500.

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