Buy a house and rent it out: Tips to calculate profit in 5 minutes

Real estate investors always have hidden investment rules that not everyone knows. These rules help investors quickly evaluate potential real estate deals. Yahoo Finance reveals the 50% rule to help you quickly determine the cost when investing in rental real estate.

What is the 50% rule ?

The 50% rule states that half of a rental property's total rental income should be set aside to cover operating expenses before calculating profits. This rule helps investors avoid the mistake of underestimating expenses and overestimating the profits they will receive.

For example, applying the 50% rule, a rental property that generates VND300 million in rent per year will have to spend VND150 million to cover related costs. The remaining VND150 million will be the investor's net income before interest and operating costs.

According to Yahoo Finance , the 50% rule does not take into account mortgage payments or property management fees. Expenses that are calculated using the 50% rule include property taxes, insurance, vacancy losses, maintenance and repair costs, and utilities.

If the source of capital to finance real estate investment is a loan, you need to calculate separately the principal cost, interest, property management costs if any, and service costs (if the property is located in an urban area).

Calculating the 50% rule in real estate transactions is very simple, no complicated formula is needed. You just need to estimate the total net rent that the property can generate monthly or annually, then divide it in half.

Simply put, like financial statements, these expenses are similar to business management costs and sales costs, not including interest, taxes, and depreciation.

For example, if you are considering investing in a property that is expected to generate 30 million VND in monthly rent, if you apply the 50% rule, you need to set aside 15 million VND/month for the expenses as mentioned above, not including mortgage and management and operating costs.

An apartment building in Hanoi (Photo: Tran Khang).

Assuming your monthly mortgage payment for the property is $9 million and service fees are around $1 million per month, you would theoretically be left with a net profit of $5 million. This is based on the assumption that you manage the property yourself rather than using a service provider like Airbnb or a broker.

Apply the 50% rule

The 50% rule in real estate investing is considered an approximation rather than a hard and fast standard for evaluating returns. This rule helps investors quickly estimate the amount of net income they can earn if they invest in a certain rental property. The main effect of this rule is to prevent them from underestimating the costs involved.

However, the disadvantage of this rule is that it gives fixed results while the market is always volatile or unusual incidents occur.

For example, you buy a rental property in a coastal area. During the operation, you find out that there are unexpected costs to prevent the house from deteriorating quickly. These are costs that you cannot foresee according to the 50% rule when buying real estate.

This 50% rule can be a starting point when deciding whether to invest in a rental property. If you know the expected net rent the property can generate, you can quickly calculate 50% of that amount to estimate net operating income.

You can then deduct other costs such as interest and taxes. Finally, you can compare your projected return figure with your goals to see if the investment makes sense.

Of course, there are other factors to consider beyond the 50% rule. You need to factor in the inflation of taxes, insurance, repairs, maintenance, and utilities. From there, you can plan for appropriate rent increases.

It is important to research the rental market in the area where the property is located. For example, it can be helpful to look at rental price trends, demand for rental properties, and the general attractiveness of the area.

Source: https://dantri.com.vn/bat-dong-san/mua-nha-roi-cho-thue-meo-tinh-ngay-ra-loi-nhuan-trong-vong-5-phut-20240614112024344.htm