The 50% rule is a screening assumption for rentals: operating expenses — vacancy, taxes, insurance, maintenance, management, and owner-paid services — will consume roughly half of gross rental income over time. The mortgage is not included in the 50%; it is paid from what remains. New investors often find the figure pessimistic until they own property through a turnover, a reassessment, and a roof year; experienced landlords use it as the starting assumption and adjust only with property-specific evidence.
The formula / structureOperating Expenses ≈ 50% of Gross Rent → NOI ≈ 50% of Gross Rent (before debt service)
50% Rule: a worked example
Worked example. Gross rent $1,800/mo. The rule estimates $900 of operating expenses and $900 of NOI. If the mortgage payment is $720, estimated cash flow is $180/mo before capital reserves — thin, and the full analysis should confirm or improve every line before a purchase.
What affects 50% Rule
- Property age and systems condition (older stock runs above 50% across a decade)
- Newer properties with warranties (can run below 50% early on)
- Tax load of the jurisdiction
- Whether management and reserves are honestly included
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