Your Guide to Monthly Rental Property Expenses
TL;DR - Cash flow isn’t just rent minus mortgage. It’s rent minus all of your rental property’s fixed and variable expenses.
You own a rental property and have hired a property manager. Things are running as smoothly as can be!
But as the months pass, you realize you don’t know exactly how much you’re earning on your property.
Sure, you’re making a profit. But how much?
What’s your income? What are your expenses?
These are important questions to ask. They’ll help you understand all the expenses you pay on a monthly basis for your rental property.
And here’s a tip…
It isn’t as simple as rent - mortgage = cash flow.
Rental Expenses
What is Rental Property Cashflow?
There’s an assumption held by many people that cash flow is as simple as rent minus mortgage…
But that isn’t the case.
It’s actually more complex - involving expenses and reserves among other factors.
In order to properly assess the cash flow of your property, you can tally up the total expenses that you should plan on paying or setting aside each month.
This will help you set a rental property expenditure budget.
And you’ll know exactly what you’re making on your investment - to the penny.
But what are these expenses, besides the mortgage?
Let’s break the main ones down so you can get a better idea of what you’ll actually be spending.
What’s the Damage?
Rental property expenses come in two forms - fixed expenses and variable expenses.
Fixed Expenses
These expenses are what you can count on paying each and every month…
They’re the necessary things you need to pay for so that you’re legal, compliant, and covered.
You can consider these:
Mortgage Payment - This only applies if you received a loan to buy your property. If you paid in full, then you’re scot-free.
Property Taxes - Your local county assessor will determine how much you owe for these.
Property Management - The person/group/company that manages your investment will generally ask for 8-12% of your monthly rent. Even if you self-manage, factor this cost in and pay yourself each month. That way if you ever want to hire somebody else, you won’t need to readjust your budget.
Insurance - This will cover both homeowner’s insurance and lender’s title insurance.
HOA Fees - Homeowner’s Association Fees. They go towards maintaining or improving your neighborhood or local area. You may or may not have to pay for these depending on where you live.
Utilities - Think water, sewer, electric, gas/heating, trash, and recycling. Your tenant could possibly cover some or all of these.
Variable Expenses
When an expense isn’t set in stone, it becomes variable. It could happen tomorrow, next month, or not at all.
Regardless, it’s good to factor them in so that you’re prepared.
Variable expenses can be expressed through flat rates each month or as a percentage of the rental income your property brings in.
Consider these examples:
Vacancy - You could lose a tenant at any point in time, leaving you with no rental income. That’s why it’s good to set aside some money each month to cover that emergency.
Marketing - You want to fill any vacancies as fast as possible. The best way to do that is through marketing - ads, social media posts, writing, photos, etc.
Capital Expenditures - Down the road, you’re bound to want to improve your property. Whether that’s getting new roofing, floors, you name it. Instead of paying solely out of pocket, you can save up for those big purchases over time.
Maintenance - We all know about the little problems that pop up over time. The toilet or drain is clogged. A lightbulb goes out. A pipe is out of wack. Allocate some money for any issues that need to be fixed.
Misc./Emergency Funds - It’d be wise to put some money to the side for the sake of it. You never know when something crazy might happen. There are also a ton of services and fees you can pick up if you so choose (or need to) - like an accountant to help with bookkeeping, brokers to find tenants, or business permits required by your city.
Okay, but What Are the Actual Costs?
The best way to find out the pricing for expenses in your area is to contact peers and professionals.
We highly recommend that you network with landlords that invest in the same area(s) as you. They’ll be able to tell you what they pay in expenses for a lot of the examples we mentioned above.
And they’ll have a lot of experience investing in properties, so they can give you tips on what services you really need and which ones you don’t.
Local property managers are experts at what they do. They manage investment properties and can tell you exactly what the going rate is for property expenses.
Finally, utility companies can give you an exact or estimated quote on what you’ll be paying in utilities for your property each month. Whether your tenant pays them or not, you’ll want to know what they are in case you ever have a vacancy.
Benefits on Your Taxes
The sheer amount of possible rental property expenses can make you feel anxious, but there’s good news…
A lot of them are tax-deductible!
Things like interest, maintenance, and travel expenses for your rental property or real estate business are all considered deductions.
This means that many of these rental property expenses can be partially or fully negated!
Of course, the list of rental property deductions goes on and on. But they can be a really in-depth subject.
So we’ll save that for another article!
Remember, Cashflow is…
Rent minus all of your fixed and variable expenses.
Some of your variable expenses will be similar to rainy day funds. You might need them down the road or you might never. But they’re good to budget for anyway.
However, your fixed expenses are vital. They’re what keeps everything running smoothly and legal.
Plan both rental property expense types into your budget and you’ll be golden…
Knowing to the penny what your monthly profit is.
Happy investing!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
