How do you know if you’re choosing the most beneficial property? Analysing a property is an important part of property investment. The 50% rule is a simple tool that allows investors to assess whether or not a property will generate adequate cash flow. Sounds pretty handy, right?
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What is the 50% rule?
The 50% rule states that property investors should expect that a property’s operating costs should approximately be 50% of its gross income. The rule is a shortcut that property investors use to quickly predict the total operating expenses of a property.
Expenses included in the 50% rule:
- Property Insurance
- Property Tax
- Property Management
Any recurring operating expenses can be included here.
Expenses excluded from the 50% rule:
- Mortgage payment
- Tax on rental income
- Property Depreciation
How do I use the 50% rule?
Essentially the 50% rule means that you should expect to have half of the rental income left after covering property expenses.
Monthly rent = €3000 Total operating expense = €3000 x 0.5 Total operating expense = €1500
Monthly cash flow:
Let’s say your monthly mortgage repayment is €1200.
Monthly cash flow = €1500 - €1200 = €300
Why is it an important rule?
When hunting for properties to invest in it’s crucial to analyse “deals” quickly, or you could risk losing the property to someone else.
It takes a lot of time to fully analyse a property, so the 50% rule can be used as a ballpark estimate to determine if a property is worth further investigation.
Why the 50% rule isn’t a guarantee
THIS IS AN ESTIMATION. It’s a tool that should be used to screen properties. You wouldn’t buy a car just by checking the mileage, but it’s a good indicator. Not all properties pass the 50% rule, some of which can still be successful. It is not completely accurate:
- Operating costs can be lower than expected.
- Rent prices in the area can increase.
The 50% rule is a useful tool however it is not the “be-all, end-all rule” rule.
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