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What is the 50% rule?
The 50% rule says that real estate investors should anticipate that a property's operating expenses should be roughly 50% of its gross income. This does not include any mortgage payment (if applicable) but includes property taxes, insurance, vacancy losses, repairs, maintenance expenses, and owner-paid utilities.
In a nutshell, the 50% rule says that if you buy an investment property in cash, you should anticipate having half of the rental income left after covering all the standard property ownership costs.
How do I use the 50% rule?
The calculation is very simple. For example, if a property could generate $2,000 in monthly rent, this means that $1,000 will be needed for the rental property expenses I discussed. This means that you can expect to receive $1,000 in net operating income from the property.
Of course, if you have a mortgage on the property, be sure to include the monthly mortgage payment in your cash flow calculation. The same can be said if your property is located in a community with an HOA or if you decide to hire a property manager to handle the day-to-day operations.
As a final thought, keep in mind that the 50% rule is just a guideline. Your property's expenses aren't likely to be exactly 50% in a real-world situation, but it does usually provide a good estimate.