The 50% rule

The 50% rule — a pre-line-item screen: assume operating expenses (vacancy included, loan excluded) consume roughly half of gross rent. It looks pessimistic next to a developer pro-forma and realistic next to five years of actual ownership. Usage: if a deal only works at 30% expenses, it doesn’t work; if it survives 50%, refine with real line items and let the deal earn its optimism. A screen, not a substitute for the real expense build-up.

First used in: 3.4 · Underwriting: the Gallinelli math