Top tips to estimate expenses on rental properties

Top tips to estimate expenses on rental properties


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Most landlords usually underestimate the costs associated with owning rental properties. The truth is there are many more expenses that go beyond the mortgage interest – whether big or small – finally adding up to cumulative costs that will have a huge impact on the profitability of your venture. If you are aware and understand what it actually takes to own a rental property, it will go a long way in indicating if your investment is actually going to give you any returns or not.

So, what are the other important expenses you must consider? Let’s take a look.

1. Marketing costs: These are the costs required to find and attract prospective tenants. You must advertise your vacancy to let people know that that your property is available. The amount you need to spend on marketing will largely depend on type and level of advertising you choose. These may include hiring a real estate agent to find you a tenant, placing an advertisement in a newspaper or on billboards or distributing flyers in the community.

2. Maintenance and repairs costs: Maintenance and repairs are a tricky business as they can pop up at the most unexpected times. And the associated costs depend a lot on external factors such as the age, type and size of the property, the types of tenants you have and your HOA specific requirements that may require you spend regularly on the upkeep. The best way to estimate maintenance expenses for a rental property is to be aware what can come up and average these out on a monthly basis. What can be included?

• Replacing a furnace, air conditioner, refrigerator
• Repairing or replacing a leaking roof or perhaps underwater drainage system
• Handling day-to-day plumbing and wiring challenges
• Drywall repair and painting
• Carpet cleaning and pest control
• Gardening
• Electricity and gas (utility) bills

Fortunately, most of these expenses can be funded by the renters but it will depend on the terms and conditions in the leasing agreement. Sometimes, some of the money goes out of the landlords pocket and not having access to any emergency funds to deal with these unexpected costs can be really stressful.

3. Insurance: Contact your insurance agent to stay on top of what kind of insurance coverage is best for your rental property. As a landlord, you are entitled to various types of insurance policies – liability, hazard, fire insurance, income protection and natural disasters insurance. While serving to protect you from monstrous financial losses in a myriad of situations, they will still add to your  expenses.

4. Homeowner Association (HOA) fees: These are the fees that property owners pay to their affiliated associations to maintain the common areas and landscaping. While landlords often pass these expenses to the renter directly or factor at least a portion (if not more) of the HOA fees into the rent, they may still have to pay for it, especially during the rental vacancy. Always check with your association about the current HOA fees and if it is scheduled to change in the near future. Also make sure if there is trend of raising the HOA fees often to calculate and plan accordingly.

5. Property taxes: It is important to note that property tax caps on rental properties are usually higher than those calculated on your place of residence. And equally important is the fact that property taxes can unexpectedly fluctuate – sending some unpleasant surprises and unforeseen expenses your way. It is best to consult your county assessor to get a tab on the current property taxes.

6. Property management expenses: Planning to hire a property manager? It is a good strategy to extract the maximum value from your investment – as a professional property manager finds you right tenants and manage them while also managing your property’s repairs and maintenance issues. But remember hiring a  property manager is going to cost you some percentage, usually 6 to 8 percent, of the monthly rent. Make sure if it also includes additional re-leasing costs to get a fair estimate.

7. Vacancy factor: Until you are extremely lucky, your property is not always going to be occupied. It can be a stressful experience to have a rental vacancy for long periods as the bills are still pouring in even when there is no monthly rent to offset these costs. The best way to deal with this fact is to be prepared. Budget for these down phases while doing your calculations.

8. Capex or home improvements: One of the most ignored expense while doing the expense estimate are the costs involved in doing upgrades, enhancements or home improvements as they are often called. These expenses are also called capital expenditures or capital improvements. Not to be confused with repairs and general maintenance, these improvement projects are undertaken time to time to improve the value of your property in many ways such as increasing the desirable traffic and to get  better rent. These may involve:

• Replacing an old dilapidated or leaking roof
• Updating or remodelling kitchen and bath
• Adding more space to the house by converting an under-utilized space into a room
• Making your home energy efficient
• Uplifting the outdoor living space
• Improving the curb appeal

These are some general guidelines estimating the costs on the rental property. It is recommended that you consult your real estate agents and property manager to get a better insight and make an informed decision. And most importantly, it is always better to overrate your expenses a little than what you may expect and have an emergency fund to cater to these unexpected and often underestimated costs.

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