The 50% Rule: Estimating Operating Expenses Quickly
Use this rule of thumb to quickly estimate operating expenses when analyzing rental properties.
The 50% rule is a quick estimation tool suggesting that operating expenses will typically consume about 50% of a property's gross rental income.
How to use it: If a property generates $2,000/month in rent: - Operating Expenses: ~$1,000/month (50%) - Available for Debt Service & Cash Flow: ~$1,000/month
The 50% rule includes these expenses: - Property taxes - Insurance - Maintenance and repairs - Property management - HOA fees - Utilities (if owner-paid) - Vacancy costs - Capital expenditures reserve - Other operating costs
The 50% rule does NOT include: - Mortgage payments - Income taxes
Important caveats: - Actual expense ratios vary by property type, age, location - Newer properties may run closer to 35-40% - Older properties may exceed 50% - Always verify with actual numbers before purchasing - Use as screening tool, not for final investment decisions
The 50% rule helps you quickly evaluate whether a property's price and rent justify further investigation. However, always conduct detailed expense analysis before making any investment commitment.