Last Updated on 25/12/2021 by Steve Wanjie
Real Estate 50 Rule.
The 50% Rule is not a law, but it has become the norm in the real estate industry.
It states that you should put down at least 50% of the purchase price on your new home.
Even though it is not a law, there are still benefits to following this rule, including avoiding private mortgage insurance and taking advantage of lower interest rates.
Real Estate 50 Rule : What is the 50% Rule and how it Works
It is a guideline for real estate investors.
The rule helps you estimate the profitability of a rental property you are interested in purchasing.
The 50% rule is a simple technique that helps forecast your investment profits.
It was first introduced to the world by Warren Buffet, one of the most successful investors in history.
Robo-advisors use the 50% rule to calculate the maximum risk a client can take on their investments.
First, they calculate how much money they have available for investments and multiply it by 0.5 to get their risk limit.
What Does the Real Estate 50% Rule Mean?
The 50% rule means that you should expect operating expenses to be roughly half of the gross income when doing real estate investing.
The math here is straightforward.
For example, if the rent on the property is $4,000 per month, this means you’ll need $2,000 monthly for all of the expenses.
It means that you can expect to receive at least $2,000 in net monthly income from your rental property.
What is the purpose of the 50 percent rule in real estate?
To help you (real estate investor) quickly decide on the potential profitability of an available rental property you want to buy.
It helps you avoid the mistakes most property investors make as they chase investment deals, such as underestimating the cost of expenses.
When do you use the 50% rule?
You use the rule at the initial stage of a property investment inquiry.
The first thing you want to do is decide whether the deal is worth your consideration.
Therefore, you incorporate the rule in the initial review of a real estate deal.
You initiate it to protect yourself from potential investment losses.
What expenses does the 50% rule include?
- Property taxes
- Vacancy losses
- Maintenance expenses
- Owner paid utilities
What expenses does the 50% rule exclude?
- Mortgage payments
- Property management expenses
- Homeowners association fees
Is the 50% rule accurate?
It is not precise because it is just an initial investment guideline. In the end, you need to include all the expenses to get a clear picture of the cost of expenses.
Does the 50% rule apply to all types of properties?
The answer is yes. You should apply the rule on any property you like to purchase, including multifamily properties.
The REA 50 rule is a simple and effective rule of thumb to help you make financial decisions in real estate.
Jim Frank, a commercial real estate investor and developer, developed The REA 50 rule.
Jim was involved in the industry for over 25 years.
He developed this rule to help his investors make decisions about their investment properties more quickly and accurately.
The idea is that if you can’t answer yes to all five questions, then the property is probably not worth the risk.
If you can answer all five questions positively, it might be worth pursuing further.
Here are the five questions:
1) Is it located in an area with positive economic momentum?
Successful real estate investments are dependent on a healthy economy. The economy of a city or area is measured by looking at the unemployment rate, interest rates, and economic growth potential.
2) Is it near an airport or train station?
When buying a property, it is important to consider the location.
One of the most important factors to consider when looking for a new home is location.
It is essential to consider the site of a property because it will affect your commute, leisure time, and even safety.
The closer you are to your office, for example, the shorter your commute will be, and the more time you will have for leisure activities during evenings and weekends.
In addition, safety considerations should account, and crime rates in your neighborhood can change depending on its location.
In some cases, crime rates may be higher in some neighborhoods due to various reasons such as poverty or drugs being a significant issue in that particular area.
Additionally, some neighborhoods may be suitable for family life but not so great if you have plans of traveling often because they are not situated conveniently.
3) Is it in the right neighborhood?
4) Is there sufficient parking?
5) Can it be easily accessed by public transport?
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Steve Wanjie is a digital marketing specialist, SEO Expert, expert article writer, blogger, sex educationist, and businessman. He is the founder of Dijito Marketing and Laikipo.com. He works and lives in Nairobi Kenya.