What is 50% Rule?
The 50% rule assumes that, over time, a rental's operating expenses (taxes, insurance, maintenance, vacancy, management, capital repairs) average about half of the gross rent — before the mortgage.
It's a sanity check against optimistic pro formas: subtract half the rent for expenses, then the mortgage, and see if anything's left.
Formula
Estimated operating expenses = 50% × gross rent. Cash flow ≈ rent − (50% × rent) − mortgage payment.
How to read it
- Whatever's left after 50% of rent and the mortgage payment is your rough monthly cash flow.
- New construction or low-tax areas may run below 50%; old properties or high-tax states can run above it.
- Use it to gut-check a deal, then replace the estimate with real numbers before you buy.
Frequently asked questions
- Is the 50% rule accurate?
- It's a rough average, not a precise figure. Actual expense ratios vary with property age, taxes, and management. Treat it as a fast reality check, then verify with itemized expenses.
- Does the 50% rule include the mortgage?
- No. The 50% covers operating expenses only. You subtract the mortgage payment separately to estimate cash flow.