How to Build a Rental's Operating Expenses — and Where the 50% Rule Actually Belongs

You've got your effective gross income from the last step — the underwritten top line. Now you subtract the cost of running the property to get to net operating income (NOI) — the property's operating earning power before debt service, capital expenditures, depreciation, and owner-level income taxes. (Property taxes are an operating expense and stay in; it's your income tax that's out.) The question is how you estimate those costs, and there are two ways: the fast way and the right way.

The fast way is the 50% rule — assume operating expenses eat about half your rent and move on. The right way, and the BFC discipline, is to build the expenses from the bottom up: list the property's actual cost lines and total them. Bottom-up wins because the 50% rule is a rough investor heuristic, not evidence about this building's taxes, this building's insurance, or this building's condition. Two properties with identical rent can have very different expense loads. A rule of thumb can't see that; a line-item build can.

So here's the build. The usual operating lines for a long-term rental are:

• Property taxes — start with current records, then verify how the local jurisdiction will reassess or otherwise change the bill after acquisition; don't assume the seller's current bill carries forward (reassessment rules, caps, ratios, and timing vary widely by place).
• Insurance — a real quote for the coverage you'll carry, not last owner's premium.
• Property management — and this one is not optional even if you plan to self-manage (more below).
• Maintenance and repairs — ordinary upkeep; the recurring fix-it budget, separate from big-ticket replacements.
• Everything else — owner-paid utilities, any HOA dues, turnover/leasing costs, legal and admin, a miscellaneous line.

Total those and you have operating expenses. NOI = effective gross income − operating expenses. On the canonical deal, the lines come to $9,600 (property tax $3,400, insurance $1,300, management ~$2,260, maintenance $1,800, misc $840), so NOI = $25,116 − $9,600 = $15,516. Every line traces to something about the property, not to a percentage.

Now the rule that trips people up on the management line. Include a management allowance even if you'll manage the property yourself. Why pay yourself an expense you're not writing a check for? Because self-management is your labor, and it's real; leaving it out makes an owner-operated deal look artificially better than the identical property run by a manager, and it hides what the deal is worth if you ever stop doing the work. Normalizing management keeps deals comparable to each other and honest about the true operating cost. For comparability, the canonical BFC model uses a 9% allowance applied to EGI — about $2,260 — even though the owner might self-manage, and it stays in the build. For a real deal, model the manager's actual fee structure: real fees are often quoted on collected base rent and can add leasing, renewal, setup, or inspection charges, so use the manager's real schedule rather than a flat "8–10% of rent."

Just as important is what is not an operating expense — because NOI is a measure of the property, not your financing or your tax situation. Four things stay out: debt service (your loan is a financing choice, not a property cost — that's why NOI is the same whether you pay cash or borrow); capital expenditures / the CapEx reserve (big-ticket replacements are an economic reserve that belongs in true cash flow, not in NOI — and reserving for them isn't a bookkeeping or tax deduction at all; when the money is actually spent, whether the cost is deducted or capitalized turns on whether the work is a repair or an improvement); depreciation (a tax deduction, not a cash cost); and income tax (yours, not the property's). Keep those four in their own lanes and NOI stays clean and comparable across deals.

So where does the 50% rule actually belong? As a screen, not an underwrite — and it's important to see why it can't be more than that. The BFC operating expense ratio (operating expenses ÷ EGI) is a precise, defined number: on the canonical deal it's $9,600 ÷ $25,116 ≈ 38%. But the 50% rule isn't that ratio. It's a gross-rent heuristic whose expense basket varies by source — and the canonical numbers show exactly how slippery that makes it. Measured against gross potential rent ($26,400): operating expenses alone are 36.4%; add vacancy and credit loss and you're at 42.4%; add the CapEx reserve too and you're at 47.4%. Same property, same build — the "ratio" moves ten points depending on which version of the rule you use. That's the point: you can't underwrite to a number that shifts with its own definition. Build the lines bottom-up, then glance at the 50% benchmark as a first-pass gut check — if your build lands far from it, treat that as a prompt to check your inputs (are the taxes right? the insurance quote real? the maintenance budget adequate for the age and condition?), never as a reason to force the build toward half the rent. Screen after build, never build to screen.

So the plain-English version: build the property's costs from the actual lines, keep debt service, CapEx, depreciation, and income tax out of NOI, normalize management even if you self-manage, and treat the 50% rule as a gut-check on the build rather than a replacement for it. Half the rent is a starting suspicion; the line items are the answer.

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The bottom line

Operating expenses should be built from the property's actual cost lines, not estimated as a slice of the rent — because two buildings with the same rent can cost very different amounts to run. Keep debt service, CapEx, depreciation, and income tax out of NOI, normalize management even when you self-manage, and use the 50% rule only to sanity-check the build you've already made. On the canonical deal that build is $9,600 of expenses and $15,516 of NOI — every dollar of it traceable to the property.

About the author

Matt Nunn is the founder of Builders Finance. He has spent two decades working with the financial side of real estate businesses, and started Builders Finance to give short-term-rental operators the financial systems, frameworks, and plain-language education that most hosting advice skips over. Builders Finance publishes educational content for STR owners; it is not legal, tax, or investment advice, treatment depends on your facts and circumstances, and it is not a substitute for guidance from your own qualified professionals.

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This resource provides general educational information and is not individualized investment advice. Operating-cost assumptions are property- and market-specific; verify every expense line for your own deal.

Primary sources / provenance: BFC Deal Analysis P06 (build costs bottom-up) and P10 (management normalization); the Phase-2 LTR metric definitions (operating expenses, NOI, operating expense ratio, the 50%-rule-as-screen, CapEx-reserve-as-economic-not-tax). Expense inputs are property-specific and verified per deal, not evergreen.