What it is
The 50% rule is a correction for optimism. Sellers and listing agents present rentals with expense lines that quietly omit the costs that only show up over years — the roof, the turnover, the month the unit sits empty, the water heater. The rule answers that by assuming half of gross rent disappears into operating costs across a full hold period, and it holds up surprisingly well on older small multifamily. It is deliberately crude. Its job is not to price your specific property but to tell you when someone else’s numbers are too good to be true.
How it is calculated
Multiply gross scheduled rent by 0.50 to estimate everything except debt service: taxes, insurance, maintenance, vacancy, management, and capital reserves. Subtract the mortgage payment from what is left to approximate cash flow. A duplex grossing $2,400 a month implies about $1,200 of operating expenses and $1,200 of net operating income before the loan. If the mortgage runs $950, the rule projects roughly $250 a month of cash flow — a thin deal that a seller’s spreadsheet may have shown as $700.
Estimated operating expenses = gross rent × 0.50. Estimated cash flow = gross rent × 0.50 − mortgage payment. On $1,400 rent with a $560 payment, that is roughly $140 a month.
How investors actually use it
Most investors run it beside a line-item budget rather than instead of one. Build the real expense stack from actual figures — the assessor’s tax bill at the reassessed value, a written insurance quote, a management rate, a per-unit maintenance and capex reserve — then compare the total to half of gross rent. When your detailed budget comes in near 50%, it is probably honest. When it comes in at 25%, something is missing, and the gap tells you where to look. The rule is most accurate on older properties and least accurate on new construction with warranties still in force.
The common mistake
Two of them. The first is including the mortgage in the 50%: debt service sits outside the ratio, and folding it in makes every leveraged deal look catastrophic. The second is applying the rule to properties it was never built for. A newly built single-family rental in a low-tax county with no HOA may genuinely run near 35%, while a 1920s fourplex in a high-tax city can exceed 60%. Tax and insurance treatment vary by state — consult a professional for your market. Use the rule as a smell test, then trust the line items.
Put it to work
Rental operating expenses, explained →
Related terms
- NOI (net operating income) — Annual rental income minus all operating expenses, but before mortgage payments and income taxes.
- Cap rate — Capitalization rate — net operating income divided by purchase price, shown as a percent.
- 1% rule — A screening shortcut: monthly rent should equal at least 1% of the purchase price plus rehab.
- Cash-on-cash return — Annual pre-tax cash flow divided by the total cash you actually invested — down payment, closing costs, and rehab.