The 50% Rule: Everything You Need to Know to Invest
Do you want to learn more about the 50% rule? Then look no further, we are here to help.
HI! My name is Michael Zubretsky. I am the owner of CT Cash Homes and have some useful tips for you if you are thinking about investing in Real Estate.
What is the 50% Rule?
The 50% Rule is a guideline that many investors use when evaluating a potential purchase of an Investment property.
It is a rule of thumb so that you can quickly analyze a properties ability to cash flow and to determine if it is worth pursuing or getting additional information to make an offer.
The speed of this quick analysis is what is important, especially in a competitive market where multi-families sell quickly.
50% Rule = Speed to Analyze Cash Flow
Simply stated – The 50% Rule says that your goal will be to keep at least 50% of the rents you collect on average after subtracting the expenses.
These expenses include
Property Tax
Insurance
Utilities
Repairs
Maintenance
Management Fees
The expenses include everything except for your Mortgage Payment.
An Example of the 50% Rule
As an example of the 50% rule – If the rents on a two family are $1,000 per month for each unit, a total of $2,000 per month or $24,000 annually then expenses should not exceed $1,000 per month or $12,000 annually.
The remaining $1,000 per month would be used for your mortgage payment and hopefully some positive cash flow.
If Rents = $24,000 x 50% Then Expenses Should Be < $12,000 Per Year
The 50% Rule is not foolproof, it is based on a general assumption that needs to be verified during the due diligence period. And of course, there are always exceptions to the 50% rule.
Exceptions to the 50% Rule
For instance – If you notice that the costs are higher than 50% of the rents, it could mean that the rents are below market value or that some major repairs have just been completed, this property may still be a great investment.
However – If you notice that the costs are lower than 50% of the Rents, it could mean that there is some neglected maintenance or possibly a miscalculation of the costs which need to be further verified.
Remember, The 50% Rule is to be used as a screening tool for your real estate deals as part of your due diligence. Good Luck with your investing! Give us a call today!
