50% Rule Calculator

Worked example

A fourplex with units renting for $1,100 a month brings in $4,400 of gross rent. The 50% rule sets aside $2,200 for operating costs, leaving an estimated NOI of $2,200 a month.

Bought for $360,000 with 25% down, the loan is $270,000. At 7% for 30 years the payment is $1,796 a month. Estimated cash flow is $2,200 - $1,796 = $404 a month, or about $101 per unit.

That clears the common $100-per-door target by a hair. It is worth a full analysis, but there is not much margin for a bad year.

What the 50% rule says

The 50% rule is a rule of thumb that a rental property's operating costs, including empty months and turnover, will average about half of its gross rent over time. Whatever is left after that half is roughly your net operating income, and the mortgage comes out of that.

It is useful because expenses are where beginners go wrong. Taxes and insurance are easy to find, but repairs, turnover, management, capital replacements and months without a tenant are easy to underestimate. The 50% rule builds them in by default.

What the 50% covers

• Property taxes and insurance
• Repairs, maintenance and turnover costs between tenants
• Property management, even if you plan to manage it yourself
• Lost rent from empty units and tenants who do not pay
• Owner-paid utilities, landscaping and snow removal
• Reserves for roofs, HVAC, water heaters and appliances

It does not cover the mortgage. Principal and interest are paid from the other half.

How accurate is it?

Over many properties and many years, 50% is a reasonable average for small residential rentals. Any single property can be well above or below. Newer buildings where tenants pay utilities often run 35% to 45%. Older buildings with owner-paid heat, high-tax states and low-rent areas with heavy turnover can run 55% or more.

Use the rule to decide whether a property is worth more of your time. Then replace the estimate with real numbers. The NOI calculator lets you enter each expense line, and the cash-on-cash calculator shows the return on the cash you invest.

Pairing it with the 1% rule

Investors often use the two rules together. The 1% rule checks whether rent is high enough relative to price. The 50% rule then checks whether that rent leaves enough after expenses to cover the mortgage. A property can pass the first and fail the second when interest rates are high, because the mortgage takes a bigger share of the remaining half.

Many investors look for at least $100 to $200 of cash flow per unit per month under the 50% rule before they dig deeper. That cushion helps absorb the months when something expensive breaks.

Common mistakes with the 50% rule

• Using asking rent instead of market rent. If the listing's rents are above what similar units actually lease for, the whole estimate is too optimistic.
• Forgetting that the rule assumes a normal property. A building that needs a new roof or has a failing boiler will blow through 50% in its first year. Add known repairs to the price before you run the numbers.
• Treating the result as a forecast. The 50% rule describes a long-run average. Some years will be far better, and the year with two turnovers and a sewer line replacement will be far worse.
• Ignoring the down payment. Cash flow looks better with a bigger down payment, but so does the cash you have tied up. Check the return on that cash with the cash-on-cash calculator before you decide how much to put down.

Used carefully, the rule gives you a realistic first look in under a minute, which is exactly what it is for.

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Results are estimates for education only, not financial, tax or legal advice. Check numbers with your lender and advisors before you buy.