Have you ever heard of the 50 percent rule about duplexes?
Do you know what it is?
The 50 percent rule is a general rule of thumb which states that all of your expenses on a rental property should run about 50 percent of what the property’s gross income is. This does not include your mortgage payment or interest.
It does, however, include your taxes and insurance.
In other words, if your rental duplex generates $28,800 in income, you can expect your expenses on the property to run approximately one half of that amount, or $14,400.
These expenses would include repairs, utilities, insurance, vacancy rates, and so forth.
Once these are deducted from the property’s income, you should have approximately 50 percent of the $28,800 left. Out of that $14,400 you will pay your mortgage and interest. Anything left over is your cash flow.
Of course, there are some neighborhoods where the vast majority of duplexes are owner occupied (and therefore are valued on a slightly different basis than just income) where this rule may not be true.
While you should perform more due diligence on any property than just an eyeball analysis, the 50 percent rule is a good way to determine whether a seller is off on their numbers, or you’re outspending on your own.