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559 S. Washington Ave., Kankakee,IL 60901

P.815.929.9258 P.815.929.9200

walter@waltersanford.com

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What Is a 40% Expense Factor? February 12th, 2009 | Posted in General Real Estate

I recently had a question posed to me about my 40% expense factor figure that I quote when talking about rental property:

The question:
Just read what you wrote about the bottom of the market: “It is when you can put 10% down on a piece of property, with a 40% expense factor, that you can then break even with a fully amortized loan.”  

Would you please explain what the “expense factor” includes?  And it’s 40% of what?   Could you also define what you mean by “break even” with fully amortized loan, i.e., what are the specific items that are included?  Is the end result that the rent then pays PITI, any utilities or other things included in the rent and a monthly amount that is reserved for maintenance and repairs?  Thank you, I really appreciate it.   
My response:
Forty percent of your rent is a high figure to express how much of your rent would be eaten up in expenses on a free and clear property.  It would include taxes, insurance, repair and replacement factor, vacancy factor, maintenance factor, attorney fees, utilities, management, and other fees. 

The goal on the property is to disregard appreciation as a bonus and make sure that the rent will cover your 40% expense factor, the principal, and interest payment.  In this matter, you would then have the tenant paying off your mortgage. 

As you increase the rent, you can accelerate the principal payments.  This is the method that many close to me have used in becoming wealthy.

Thanks for asking.

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