The 50% Real Estate Rule Of Thumb

Giro Katsimbrakis explains how to quickly calculate the worth of a potential investment.

When it comes to real estate investments, multifamily properties are hands down the most effective way to increase your net worth. But not all properties are good deals. Here’s a simple 4-step math tool you can use to identify a great multifamily investment. It’s called the 50% Rule.

1. Start by determining your Gross Monthly Income. This is the total sum of all rents, laundry, and other money coming in.
2. Next, use the 50% Rule to determine your monthly expenses. The 50% Rule states that over time, on average about half of your Gross Monthly Income will go towards non-mortgage expenses such as repairs, taxes, insurance, ongoing maintenance, vacancy charges, etc.
3. Then determine your Monthly Mortgage Amount.
4. Subtract your Monthly Mortgage Amount from your total in step two. The difference is the extra cash flow that you get to keep per month.

Let’s do an example:

1. 123 Main Street is a three-family property currently listed at $125,000. The units go for $400, $500, and $625 a month, plus there’s $25 per month per unit for storage. So, Gross Monthly Income = $1,600.
2. Using the 50% Rule, we can reasonably predict that half of that is gonna go towards expenses, leaving us with $800 per month to pay the mortgage.
3. Using an online mortgage calculator, we can determine that if we bought the property for $125,000 and put down a 20% down payment, our mortgage would be $100,000, and at 5% interest over 30 years, our Monthly Mortgage Amount = $536.
4. If we have $800 per month after expenses, and $536 of it is going towards mortgage, that leaves us with $264 per month in cash flow.

Now, if we can be making $264 per month in cash flow, that’s $3,168 per year. And on a $25,000 down payment, that works out to a 12.67% cash on cash return on investment. You can compare these two numbers–the monthly cash flow and the return on investment–with other investment opportunities and see if the deal is worth it to you. I like to tell people to not settle for any less than $200 per month per unit in cash flow.

Lastly, remember that this is a rule of thumb to be used for making quick decisions. It doesn’t take into account future rise in value, the loan pay down, or tax benefits. Once you decide you’re interested, always sit down with a spreadsheet and calculate line by line the actual expenses of the property based on the history.

Giro Katsimbrakis has twenty years worth of real estate industry experience. He began as a leasing agent for Kiska Developers in New York City, and quickly worked his way up the company ladder to Director of Sales. After bringing the company out of the red and expanding its office to over twenty agents, he started his own commercial and residential real estate company, East River Properties. After taking over the Las Vegas and Arizona markets, Giro Katsimbrakis relocated to the Dallas/Fort Worth area and founded DPW Properties, which he is currently in the process of expanding nationwide. Throughout his long and successful career, Giro has rehabbed over four hundred properties, and bought and sold millions of dollars worth of real estate.