31 Percent Rule

What it is

The 31 percent rule is how much of gross rent disappears before the mortgage ever shows up. Break it down: 7% vacancy, 8% maintenance, 8% capital expenditures, 8% property management. That’s 31%. Ross also calls this the 60% rule — you get to keep about 60% of what comes in, and your mortgage payment has to fit inside that 60%.

The 7% vacancy covers turnover time, non-paying evictions, and the occasional extended listing — basically one month per year empty or one out of every 12. The 8% maintenance is the routine stuff: faucets, doors, weather stripping, appliance repairs, normal wear. The 8% capex is the slow accrual for the big hits — the roof at year 15, the HVAC at year 12, the water heater at year 10. The 8% property management is the fee whether you pay a company or pay yourself for your own time.

Why it matters

Ross learned this the hard way. He was renting houses for around $1,700 a month with mortgages of $1,200. That’s $500 a month, which sounded like a good deal until a tenant moved out and left one of his places looking like a disaster. “I figured out I was actually losing around $200, maybe $300 a month. That is no good.”

Here’s the math run correctly: $2,000 in rent times 60% leaves $1,200. That’s your mortgage ceiling. If your PITI is $1,200 on a $200K purchase, you’re at breakeven after everything. That’s acceptable. Negative is not. “Never negative because that’s stealing from everything else.”

This is why the 1 percent rule exists as a quick filter — it’s the shorthand version of the 31% math. A house that hits 1% rent-to-value will, in most normal-rate environments, produce a mortgage payment that fits inside the 60% you actually get to keep.

How it shows up

On a 16-property portfolio Ross walked through publicly — 16 single-family rentals, all matured — he brought in about $250K of income. Total expenses (maintenance, management, legal, vacancy, misc) ran about $60K. That’s around 24% on that portfolio, which is better than 31% because the properties are B-class and well-managed. After debt service of $183K, he was left with about $7K of cash flow on $250K in rent. About $500 per year per property.

“You’re probably asking, why the heck would you go through all this trouble if you’re only going to make $7K off of 16 properties?” Because the equity game is separate from the cash flow game. The wealth is in loan paydown, appreciation, and the fact that in 30 years that mortgage goes to zero. The 31% is what you underwrite to so you never go negative while the equity game plays out.

D-class properties run closer to 40%+ because evictions, repairs, and vacancy are all higher. That’s one of the main reasons Ross doesn’t hold D-class regardless of how good the cap rate looks on paper.

Related

cash flow, wealth engines, vacancy, property management, capex, 1 percent rule