As I grow my portfolio, I’m seeing some of the “rules” I’ve studied about real estate investing come to life more and more. When I first started adding rentals, I read about the “50% Rule” on several blogs, books, and courses. It always seemed high to me, and clearly, because I was so intrinsically awesome, could manage MY properties much better than that and could easily make FAR more cash flow than the rest of the peasant hoard… well, peasant…landlord…hoard…
…whatever.

Point is, I was wrong, and the 50% rule proved to be pretty accurate in my portfolio.

The rule is pretty simple, take 50% of your gross rent for a property and throw it away.

Huh?

Yeah, chuck it… and by “chuck it”, I mean “assume it’s spoken for”.

That first 50% should cover operating costs like taxes, insurance, property management, capital expenses, and any random extras that may come up specific to the property (landscaping, sewer treatments, assessments, etc).

50% isn’t an exact number, it’s a general range, and it’s proving to be more or less accurate for me, at least in my market.

When I rehab a property, even to hold as a rental, I tend to bring it up to a pretty high standard. As a result, when I initially put a property into the portfolio, I usually have low CAPX costs. This can lead to lower costs, giving me a number more like 40% as operating costs, but over time, I’m assuming that will be equalized by higher ticket replacements, like a furnace or a roof.

50% makes me comfortable.

I’ve also heard this reinforced by other local investors I’m close with. Josh Sterling, the owner of Epic Property Management, has (at the time of this writing) 169 units in his portfolio. His numbers across the entire portfolio average out to around 50%, supporting the assumptions of the 50% rule.

The remaining 50% is split between (taxless) debt service and your cashflow.

After accounting for that 50% and your debt service, that sexy rent check might start to look a little wimpy, but it’s better to be realistic about your actual total cost of ownership from the beginning instead of robbing peter to pay paul later down the line.

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