The rule

Estimated NOI = gross rent x 50% Estimated cash flow = gross rent x 50% - mortgage payment

The 50% covers everything except the loan: vacancy, property tax, insurance, repairs, a reserve for big replacements, management, and any utilities or HOA dues the owner pays. The other half of the rent is what is left to pay principal and interest and, with luck, leave some cash flow.

It is a rule of thumb, not a law of nature. It exists because new investors tend to forget costs, and an honest, all-in tally for an ordinary rental often lands somewhere near half the rent. Use it when you have a rent and a price but no expense history yet.

Quick worked example

Made-up numbers. They are not the calculator's starting numbers. A single-family rental priced at $240,000 rents for $2,400 a month. You put 25% down and borrow $180,000 at 6% for 30 years. The payment is $1,079.19 a month.

  • Half the rent for costs: $2,400 x 50% = $1,200
  • Estimated NOI: $1,200 a month
  • Estimated cash flow: $1,200 - $1,079.19 = $120.81 a month

That took ten seconds. The result says this deal is thin but positive. Now check it against real numbers.

Checking it line by line

Same made-up property, with each cost set out the way the rental cash flow calculator does it:

  • Vacancy at 5%: $2,400 x 5% = $120
  • Property tax at 1.25% of price: $240,000 x 1.25% / 12 = $250
  • Insurance: $1,500 a year / 12 = $125
  • Repairs at 5% of rent: $120
  • CapEx reserve at 5% of rent: $120
  • Management at 8% of collected rent: ($2,400 - $120) x 8% = $182.40
  • Tenant pays utilities, no HOA: $0
  • Total: $120 + $250 + $125 + $120 + $120 + $182.40 = $917.40 a month

That is $917.40 / $2,400 = 38.2% of rent, well under half. Cash flow is $2,400 - $917.40 - $1,079.19 = $403.41 a month. So for this newer house with tenant-paid utilities, the 50% rule was too cautious by about $283 a month.

When costs run over 50%

Now make it an older house where the owner pays water, sewer and trash, $200 a month, and repairs run 10% of rent instead of 5%:

  • Add utilities: $200
  • Repairs go from $120 to $2,400 x 10% = $240, so add $120
  • New total: $917.40 + $200 + $120 = $1,237.40 a month
  • Share of rent: $1,237.40 / $2,400 = 51.6%
  • Cash flow: $2,400 - $1,237.40 - $1,079.19 = $83.41 a month

Here the rule was close, a little optimistic. The same rent on two different houses gave costs of 38% and 52%. That spread is why the rule is a screen and not an answer.

Costs tend to run higher with older buildings, owner-paid utilities, high property tax areas, HOA dues, expensive insurance markets and lower rents (fixed costs take a bigger share of a small rent). They tend to run lower with newer buildings, tenant-paid utilities and higher rents.

How to use the rule

  • Screen listings. If a deal does not cash flow even at 40% costs, it probably will not at real costs either.
  • Sanity-check a seller. If a listing claims costs of 25% of rent, find out what is missing. See what is NOI for the lines to look for.
  • Pair it with a rent-to-price screen like the 1% rule or the gross rent multiplier.
  • Never close on it. Before you buy, get the tax bill, an insurance quote and real rent comps, and set a vacancy rate you can defend. See vacancy rate assumptions.

The full step-by-step method is in how to calculate cash flow on a rental property.

Try the rental cash flow calculator to replace the 50% guess with your own line-by-line costs.

FAQ

Does the 50% rule include the mortgage?

No. The 50% covers vacancy and operating costs only. You pay the mortgage out of the other half.

Is the 50% rule accurate?

It is a rough average. Newer homes where tenants pay utilities often run well under 50%. Older buildings where the owner pays utilities can run over it. Use it to screen, then do the line-by-line math.

How is the 50% rule different from the 1% rule?

The 1% rule compares rent with price. The 50% rule estimates costs from rent. They answer different questions, and many investors use both as quick screens.

What if my costs are much lower than 50%?

Check that you counted vacancy, repairs, a CapEx reserve and management. Those are the lines most often left out. If they are all in and costs are still low, the rule simply does not fit that property.