Owning a rental property is one of the best investments an investor can make in real estate. Before getting into this lucrative market, though, an in-depth analysis must be carried out.
Most real estate investors buy rental properties based on their “gut feeling” without taking time to account for operating expenses. Consequently, they’re bound to lose a lot of money because they have to pay more taxes than their actual rental income.
Tax laws today have become incredibly friendly for real estate investors by providing some unique tax benefits. For an investor to key into these benefits, there’s the need to know certain things.
This article about rental property operating expenses will shed more light on rental property expenses that investors have to consider.
In the subsequent paragraphs, we’ll be examining rental property operating expenses, costs of owning a rental property, and a checklist you should keep track of when calculating your property expenses.
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Operating Expenses Present in Rental Properties
The sole aim of owning a rental property is to achieve a positive cash flow with rental income. To keep cash flow positive, you need to understand operating expenses while identifying negligible other expenditures.
The operating expenses that you’re likely going to encounter on that rental property you own include:
Maintenance
Maintenance costs can never be avoided on rental properties. If you own a rental property, you have to settle all the bills relating to maintenance. The most challenging part of this operation expense is creating budgets as no one knows what might happen in the nearest future.
If you’re going to create a budget, a general rule is for you to take one percent of the property’s value for maintenance costs. For example, if the property is valued at $350,000, you need $3,500 for maintenance.
A whole host of factors influences maintenance costs. They are ranging from age, size, and type of property. You’re concerned with roofing, painting, and appliance changes as the owner.
Insurance
Insurance is one necessary operation expense for rental property owners. By law, every homeowner must acquire the “landlord’s insurance.” You can quickly get an estimate by speaking to insurance agents and giving them details of your property.
Taxes
Taxes are part and parcel of any investment, and real estate investment isn’t any different. To make sure you know the exact amount of tax you’re to pay, contact your county accessor to determine the taxes that your property requires.
HOA Fees
HOA stands for “Homeowners Association.” HOA fees vary, which making it imperative to find them out by contacting your real estate agent or property owner. Alternatively, you can also pick up past fees records to do a valuation, as fees increase with time.
Fees for Property Management
Property management fees are usually around 6-8% of the rent. Consequently, you’ll need to engage a property manager’s services when you’re not available to manage your property. Watch out for re-leasing costs, though, as they might accumulate to up to 50% of the total rent.
Utility Bills
Utility bills are also part of operating expenses. As a property owner, it’s wise to leave them for your tenants to pay. Because when people pay their electricity and water bill, they tend to be more conservative. When left for the landlord, utility bills become expensive very quickly.
Apart from operational expenses, other negligible costs include:
- Waste disposal
- Pest control
- Pool care
- Legal fees
- Internet subscriptions and maintenance
- Snow removal
What Isn’t Included in Operational Expenses?
The following are significant expenses not included in operational costs.
They include:
Mortgage Repayments
The idea of owning and renting out a property is that you make enough rental income that can cover your mortgage expenses. To determine your mortgage expense, try using a mortgage affordability calculator to accurately determine the cost.
Your mortgage is never part of your operational costs. On the other hand, you shouldn’t worry about mortgage payments if you bought your property with cash.
Advertising Costs
To lure new tenants over time, the need to advertise your property for rent while conducting some essential marketing. Costs that you take care of here aren’t operational expenses.
Making House Improvements
Also known as renovations, making house improvements are crucial in improving your tenants’ comfort. While this creates a massive hole in your pocket, making house improvements aren’t part of operational expenses.
Major Repairs
Significant repairs are needed in cases of structural defects. The need to carefully plan major maintenance is essential because it results in tenants’ vacating your premises.
Time
The phrase “time is money” comes in handy here. Taking time off isn’t a crime, as you can engage in activities that matter.
Refinancing Your Property
To refinance your property, you need to hire a property manager or a lawyer. These costs, while not being operational, can be expensive.
Rental Property Expenses Checklist
Keeping track of a lot of things while calculating operational and variable expenses is never easy. Having the right rental property expenses checklist is crucial. Understanding all these would give room for the creation of an accurate budget. They include:
- Property insurance
- Travel expenses
- Income taxes
- Closing costs
- Real Estate broker fees
- Tenant screening costs
- Property management fees
- Pest control costs
- Landscaping fees
- Vacancy cost allowance
- Property turn expense between tenants
- Property upgrade fees
Having this checklist with you at all times ensures that you get the necessary deductions and benefits needed to enjoy estate-friendly tax laws.
Conclusion
Having all the above boxes checked would go a long way in making the budget that perfectly accentuates your property. The more you know about rental properties and their expenses, the more favorable your cash flow. Suppose you’re looking for the right rental property. Seeking advice from experts concerning rental property operating expenses is a must!
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Thanks for writing about the operational expenses of rental properties, very informative!