Before you invest in rental property, make sure you understand the full expenses that come with it. Many investors just look at the profits – the difference between the price they can buy and sell the home for. What about the ‘in-between’? If you keep the property and rent it out to earn passive income, you’ll pay many expenses that can eat into your profits.
Knowing the rental property expenses upfront helps you decide if a property is a good investment. Remember – just because you can buy a home for a ‘steal’ doesn’t mean you’ll earn a profit when you sell.
A fully informed investor makes smarter investment decisions that ensure a greater bottom line for their rental property.
The Most Common Rental Property Expenses
Each property will differ, as they each have their own distinct issues or needs, but expect some of the following expenses:
1. Property taxes
As the landlord/property owner, the real estate taxes are your responsibility. Take the property tax rate from your tax assessor and multiply it by the assessed value. Divide the total by 12 and that’s your monthly property tax rate.
2. Property insurance
Mortgage companies require property insurance – if you don’t have a mortgage, consider it. If the property burned down, had storm damage or was victim to vandalism, you’re responsible for the repair costs. Insurance helps offset these costs, but you must pay the premiums, which vary by area, type of property, and coverage.
3. Maintenance costs
Predicting maintenance costs is difficult, but on average, you should save 1% of the property’s value for routine maintenance and repairs. If a property is worth $300,000, expect around $3,000 per year for ROUTINE maintenance alone. Budget more if the neighborhood’s turnover rate is higher. If you’ll be marketing to new tenants every year, for example, you must paint and replace the floor more often and improve the home’s curb appeal multiple times.
4. Unexpected repairs
Life happens and things break. Water heaters, furnaces, and pipes all have life expectancies, and yet, they can require repairs more often. You should set aside 10% of your monthly rent for these unexpected occurrences so they don’t leave you in financial despair.
5. Vacancy costs
You don’t pay vacancy costs out of your pocket, but they do hurt your profits and your bottom line. Know the vacancy costs in the area; they often range from 2% – 20% based on the area’s average turnover. Just because there isn’t a tenant doesn’t mean you don’t have to keep up with the home’s maintenance, pay the taxes, insurance, and mortgage.
6. Marketing costs
Word-of-mouth marketing is free, but it’s not always enough. If you want to fill your property with tenants fast, paid marketing may help. How you market the property determines the cost. For example, listing with a real estate agent may cost up to 2x the rent, whereas an online listing or newspaper ad may cost a few hundred dollars in comparison.
7. Screening tenants costs
You are allowed to charge an application fee, but know how much it costs to run the checks you require, including a background and credit check, both of which run around $30 – $50 on average each.
8. Homeowner association fees
Know if the development charges an HOA fee and figure it into your expenses, as it’s your responsibility. You may include it in the rent, but consider vacancies and non-payments too.
9. Accounting and tax preparation fees
If you own more than one property, you may want the help of an accountant or tax preparer. Even if you own a single property, the tax rules and benefits increase; make sure you take advantage of all of them.
10. Property management
You may manage one rental property, but what happens when you own multiple properties? Many investors hire a property manager. The average manager charges between 8% – 12% of the monthly rent.
11. Your time
You may not pay yourself, but paying attention to the time spent maintaining, repairing, advertising, and managing the property is important. Time is money. If you spend too much of your time on this home, what is the opportunity cost and what are you losing?
Knowing or estimating the rental property expenses ahead of time helps you make a solid real estate investment decision. Just because a house looks like a great deal, don’t assume it is until you’ve evaluated all expenses and looked at the bottom line. Using these steps ensures a greater chance of realizing decent profits.