Rental Property Operating Expenses: What to Budget (and the 50% Rule)

The fastest way to turn a "cash-flowing" rental into a money pit is to under-budget expenses. New investors count the mortgage and the obvious bills and call the rest profit. The professionals budget for everything — including the costs that don't show up every month but always show up eventually.

The expenses everyone counts

• Property taxes and insurance
• Property management (even if you self-manage — price your own time)
• HOA dues and any utilities you cover

The expenses that sink deals

• Vacancy. Budget 5–8% of rent even when it's full — turnover is not optional.
• Maintenance and repairs. Ongoing wear: plumbing, appliances, small fixes.
• Capital expenditures (CapEx). The big-ticket replacements — roof, HVAC, water heater. They're rare, expensive, and certain. Reserve for them monthly.

The 50% rule as a sanity check

The 50% rule says that, over time, operating expenses (everything except the mortgage) tend to eat about half of a rental's gross rent. It's a rough screen, not a substitute for a real budget — but if your detailed projection shows expenses at 25% of rent, the 50% rule is telling you that you've forgotten something.

Build the real number

List every category, use real quotes and tax records rather than the seller's figures, and add reserves for vacancy, maintenance and CapEx. The result is your true net operating income — the only figure worth underwriting on.