The 50% rule formula
Estimated cash flow = (rent × 50%) − mortgage payment
The rule assumes that, averaged over many years, about half of a rental’s income is consumed by operating expenses: property taxes, insurance, repairs, capital expenditures, vacancy and management. The mortgage is not part of that half.
A worked example
A property rents for $2,400. The rule sets aside $1,200 for expenses, leaving $1,200 of net operating income. If principal and interest are $950, estimated cash flow is $250 a month.
Why half?
New investors usually count taxes and insurance and forget the irregular costs: the roof, the water heater, the month between tenants, the eviction. Spread over the life of the property, those add up. The 50% figure is a deliberately cautious correction for that optimism.
How accurate is it?
It is a rough average. Newer homes with tenants who pay their own utilities often run at 35% to 45%. Older properties, small multifamily buildings where the owner pays utilities, and low-rent houses can run above 50%, because a furnace costs the same whatever the rent is. Use the rule to screen, then replace it with real numbers.