Rental property is a good investment and a great source of earning money passively. However, before diving into this business, you must familiarize yourself with the expenses involved in owning and running one. That way, you derive maximum profit from your investment.
Therefore, we bring you the steps that’ll enable you to list your rental property operating expenses even before purchasing it.
1. Carry Out Due Research
Perhaps you’re on the verge of buying a rental property, or even a budding investor, don’t shy away from asking other landlords about their usual operating expenses. Besides, joining a real estate investment club is an excellent way to get access to such valuable information.
Doing your due research will help you embark on a rental property analysis that will enable you to calculate the cash flow involved in the business.
However, landlords and real estate investment clubs aren’t the only means for deriving knowledge about this business; you can do so via:
Local Property Manager
This set of people are also custodians of practical advice on rental property expenses. Additionally, they will be willing to help you cause they know many real estate investors require a property manager.
Expenses involved in rental properties include utilities. To accurately budget for these expenses, you may have to contact your utility companies. They are in the position to show you at least the estimated average of your utility bill. Reaching out to these companies will help you list your rental property operating expenses.
2. Formulate a Rental Property Expenses List
After embarking on research, the information derived will help you make a comprehensive list of your rental property operating expenses. This list will include variable and fixed expenditures involved in running and managing the property effectively.
The variable expenses will include:
- Capital expenditures
- Periods of vacancy and
- While the fixed expenses are:
- Property taxes
- Homeowner association fees
- Sewer/water, and
- Natural gas/heating
Accounting for your fixed expenses is relatively simple, especially after making your findings. However, we can’t say the same for your variable costs cause they don’t recur frequently.
You may have a tenant occupying your property for four years but subsequently not have anyone occupy the same property for months.
Also, the amount for the vacancy of rental property varies according to location. Therefore, you should inquire from landlords or property managers within your vicinity about their fees.
So, given your findings, you may assume that your property will be empty for two months annually. This assumption means your vacancy percentage will amount to 2/12 or 16.7 percent.
Furthermore, capital expenditure and repairs aren’t frequent too. Therefore the appropriate way to account for this expense is by using the percentage rate.
3. Add Up Your Information
Combine the figures gathered during research to arrive at your expenses. This step will help you determine the estimate for running your rental property. Get a spreadsheet to help you track the costs associated with rental property.
Don’t forget that you’ll need to continually review your estimate since the cost of property and utilities are unstable.
Other Operating Expenses to Estimate
Your rental property expenses include the variable and fixed costs we estimated previously.
But that’s not all:
There are soft costs involved (these are expenses associated with developing or owning real estate). Therefore, it’s essential to account for the following soft costs when estimating your rental property expenses:
- Emergency costs
- Accounting fees
- Marketing expenses
- Home inspection fee
- Closing costs
- Property management costs
- Legal advisors
- Cost to screen tenants
- Business permits
- Pest control
We’ll take our time to clarify each of them below:
Running a business also entails setting money aside for unforeseen circumstances. This money will cater for emergencies. As a real estate investor, you may have to deal with incidences like sudden pipe breakage or a heating system blowing off—plan to cover them when they occur.
Calculating the figures involved in running your rental property could be tasking. You may find it overwhelming or probably not have the time; either way, it becomes necessary to employ an accountant who can assist you with recording the financial transactions involved. Therefore, enlist the cost of hiring this service into your rental property expenses.
Every business needs marketing to thrive. The real estate business isn’t an exception. After getting your property, you must advertise it to potential clients using different mediums like social media, digital ads, and fliers. Choose the platforms you deem fit and include the costs into your budget.
Home Inspection Fees
Before purchasing a property, you must inspect it to avoid incurring other expenditures like repair costs in the future. Decide to pay for an inspection, bearing in mind that the price for this step varies on the location, type, and size of the property. However, the budget between 200-500 dollars.
Purchasing a new rental property carries closing costs between 2-5 percent of the property’s price. You’ll be paying for underwriting costs, recording fees, and mortgage applications. Include these expenses into your expenditure.
Property Management Costs
In the beginning, you may be okay with managing your property by yourself. However, as time goes on, your portfolio will increase, and it will become tasking for you to handle your business. Another thing is, you may be too busy, or you’re not in the same city as your property. Therefore, you’ll need to employ a property manager.
The cost of this service is between 8-12 percent of your monthly income from the property.
There are constitutions binding property owners and tenants. When a situation arises, seeking the help of a legal advisor is advisable. Therefore ensure you factor legal fees into your rental property expenses.
Buildings stand the risk of being damaged by termites. Therefore, to prevent this occurrence, you should pay for a pest inspection service. Rates for this service varies on the location and control plan.
You’ll enjoy a profitable portfolio in real estate investment if you have the right clients. We advise that you screen your tenants so you can rent your property to those willing and able to pay. Meanwhile, as a property owner, you must accept the Fair Credit Reporting Act.
In conclusion, don’t feel discouraged given the expenses involved in operating a rental property; there is a tax reduction attached to these properties that make owning property worthwhile. Therefore go prepared and make the most out of your investment.