The Top List of Rental Property Expenses
List of Rental Property Expenses
Owning and investing in rental property is an excellent retirement or additional income strategy. There are important financial considerations that should be understood before acquiring a rental property. Commercial properties, as well as residential buildings, have expenses associated with each phase of ownership – acquisition, operation, and sale. It’s important to identify expenses before purchasing a rental property to better understand the costs involved with owning rental property.
To begin with, buying a rental property involves a variety of considerations and expenditures before taking title to the property. Costs can occur even before the property has been located. Many online real estate investment consulting sites, property listing sites, and other services are offered for a wide range of prices. Some of the websites offer free information in exchange for an email address or telephone number. Other online resources provide buying services like title searches and home inspections. In each case, a cost is usually involved in receiving the desired information. It’s a good idea to put together a budget that can be followed so that expenses don’t get out of hand. Listed below are areas which may require spending money:
- Internet resources
- Inspection services
- Title and Deed research
- Environmental reports
- Plat maps and building plans
Other Expenses Before Buying
Buying rental property doesn’t always take place in the same city or region the buyer lives in. That means traveling to the location of the rental property to conduct a site analysis of the property under consideration. The costs of travel must be calculated into the budget. Plane flights, hotel rooms, meals, local transportation, and other expenses will be incurred before the purchase of the property is completed. A home inspection service can be retained instead of travel, but this too has costs associated that must be budgeted. Even driving around town looking for properties costs time and money, so it’s important to account for the fuel and other expenses involved in the research phase of acquiring a property.
Rental Property Acquisition Costs
Once the right property has been located the price has to be agreed to before a purchase agreement can be drawn up. In some cases, this phase requires legal counsel, engineering information, and other technically important processes to make the deal. These expenses may be shared between the parties or they may be the exclusive expense of the buyer. In any case, it’s a good idea to allow sufficient funds to cover these costs upfront. All of these expenses are tax-deductible as the cost of doing business so it’s vital to keep records of the costs for tax purposes – even if the purchase doesn’t go through. Smart rental property buyers anticipate and negotiate real estate agency fees, title fees, and other expenses to keep their costs as low as possible.
The Costs of Financing Rental Property Ownership
Once the property has had the financing arranged and has been purchased, the list of expenses can increase dramatically. The property may need to be improved, upgraded, or completely remodeled. Some mortgages and loans allow for this cost to be included in the amount financed for the long term. Construction loans for a new property can be rolled-over into the final mortgage saving the owner a lot of cash while extending the time frame for repaying the costs. However, subsequent work done on the property will most likely be at the owner’s expense. Allocating funds from rental proceeds is essential to retaining a reserve of cash that can be used to pay for the additional expenses. Rental properties are considered commercial business enterprises and the financing is more restrictive than for owning a personal residence. Down payments on loans or mortgages are generally in the 20% range for commercial property mortgages as opposed to private residential mortgages than can require as little as 5% down payment.
Rental Property Expense Checklist
Commercial property comes with a multitude of items that require payment at various times and for a variety of reasons. The list is broken into two sections. The first section deals with the main expenses of rental property ownership. Listed below are some of those important items to consider:
- Mortgage payment
- Maintenance costs
- Property Management fees
- Accounting and Administrative costs
- Property taxes
- Vacancy rates
These expenses would be considered routine expenses that should be accounted for on a month-by-month cost basis. In other words, the taxes may only be paid once a year but their costs should be factored into each month’s expenses. Even when a property owner isn’t employing an accounting or bookkeeping service or paying for property management fees, the owner still has to spend time performing these tasks themselves. The value of that time shouldn’t be zero but should reflect an accurate value for the owner’s time.
More Items on the Rental Property Expense Checklist
Things can go wrong with a rental property even under the best of circumstances. Expenses can pop-up suddenly and require immediate attention. That means spending money and in some cases, it can be a lot of money. Rental property owners should have insurance policies in place to cover the major problems but there aren’t many insurance policies for the routine things that can go wrong. The list below outlines some potential expenses that all landlords and property investors can expect at some point:
- Plumbing repairs or upgrades
- Kitchen updating or remodeling
- Bathroom updating or remodeling
- Appliance repairs or replacement
- Electrical repairs or replacement
- Window and door repairs or replacement
- Foundation, Wall, and Roof repairs
- Painting – Interior and exterior
- Furnace, Water Heater, and Air Conditioner repairs or replacement
Once again, the list shows rental property owners have to be financially prepared to deal with any of these problems and they must be able to handle the problem quickly. Tenants aren’t going to wait long for the water heater or dishwasher to get fixed. Landlords must have the funds available to resolve emergencies immediately. That means budgeting in anticipation of potential expenses and costs.
How to Budget For Rental Property Expenses
There are a lot of items to consider when constructing a budget for a rental property. Smart real estate investors and owners know it is critical to allow for regular expenses as well as unexpected expenses. That means coming up with a workable budget that rental payments don’t bankrupt. While it is impossible to anticipate every possible expense and cost associated with a rental property, the list below is a great starting point for calculating a budget:
- Mortgage Payment – $750/month
- Property Taxes – $100/month
- Property Insurance – $75/month
- Property Maintenance – $100/month
- Accounting – $25/month
- Property Management – $150/month
- Vacancy Loss – $100/month
- Capitalized Expenses – $200/month
- Total Budgeted for Property Expenses – $1,500/month
For the above example, a rental property owner would need to receive rent payments of about $1,750 per month or more.
Consequences of Bad Budgeting
Many property owners believe they need to get paid a little more than the mortgage payment on their property to make ends meet and they couldn’t be more wrong. As the above example demonstrates, a landlord receiving a rental payment of only $1,000 per month is going to go broke pretty quickly. The example shows the costs of ownership are over twice the mortgage payment amount. Calculating a workable budget should be done before purchasing a rental property due to other economic factors that influence rental prices for any given property or situation. The ratio of costs versus income is a constantly changing formula and should be reviewed regularly to avoid a financial disaster.
Cash Flow is King for Rental Property Owners
Owning a rental property demands attention to financial concerns and issues that may be beyond the control of the owner. Economic conditions affecting local rental rates like factory closures or population declines can reduce the prices charged for a rental property, In the same respect, a growing and dynamic local economy creates the opportunity to gain additional revenue from rentals. Other factors such as inflation, rising costs for services, and other “hidden” expenses can chip away at a rental property owner’s profit, causing problems further downstream. The ability to maintain a proper amount of cash flow from a rental property can make the difference between a good investment and a bad investment. Knowing the budget and what it represents is critical to determining the marketability and profitability of a rental property.
Education is the Key for Rental Property Owners
Conditions have changed concerning rental property. Laws and ordinances are different from state to state, city to city, and even between neighborhoods. Education is vital for a property owner to receive the benefits of rental property ownership and investment. Many good financial results can be experienced when the decision to become a rental property owner is made, but it will take an ongoing commitment to staying abreast of more than just what’s going on with property itself. Many owners find it advisable to retain the services of a knowledgeable and experienced rental property management company to handle all the math, paperwork, and administration for their rental property. In any case, detailed and accurate information before and during rental property ownership is the only formula for success.