Are you thinking about purchasing a rental property but want to learn more about all of the expenses involved? Owning a rental property can be an exciting and lucrative investment. It can also be a great tool for earning passive income or accumulating long-term wealth. Keep reading for a complete list of rental property expenses and you will be investing in your first property in no time!
As an investor, it is important to do your due diligence and consider all of the factors involved in buying a rental property. There are many things to consider such as the physical condition of the property, what rent you can charge for your area and what expenses to expect. We are going to take a deeper look at what rental property expenses to consider before purchasing a property.
Estimating your rental property expenses is something that you must do to know if your property will be profitable or not. Listed below are common rental property expenses that you should consider before purchasing a property.
List of Rental Property Expenses
- Property Taxes
- Insurance
- Mortgage
- Homeowner’s Association (HOA) Fees
- Property Management
- Capital Expenditures
- Lawn Care
- Vacancy
- Utilities – Gas, water, electric etc.
What are Rental Property Expenses?
Property Taxes
Property tax, sometimes called an ad valorem tax, is a tax on real estate and some other types of property. The property tax is usually based on the property location and how much it’s worth.
You can often just ask your realtor or the previous landlord/homeowner what the property tax is on the home as you are with them inspecting the property.
Insurance
Property insurance is a type of insurance policy that can provide coverage for property owners. These policies can provide coverage for damages such as those caused by fire, flooding, theft, weather, and other risks.
Mortgage
A mortgage is an agreement with a bank or other lender that charges interest in exchange for taking title of the debtor’s property. Once the properties debt is paid the transfer of title becomes void.
The principal portion of the mortgage is the amount that pays down your outstanding loan amount. Interest is the cost of borrowing money.
Homeowner’s Association (HOA) Fees
A homeowners association fee (HOA fee) must be paid monthly by owners of certain types of residential properties, and HOAs collect these fees to assist with maintaining and improving properties in the association.
Depending on where you are investing, you may not have HOA fees. For example, we invest in small towns and never have to worry about HOA fees.
Property Management
Property management refers to the act of overseeing and managing real estate by someone other than the landlord. Managers are responsible for the day-to-day operations including screening tenants, collecting rents, and following through with eviction proceedings.
If you have the skillsets and prefer to be more involved with your property then you can manage the property yourself. If you aren’t interested in playing that role, then you can expect to pay a property manager somewhere between 8-12% of your gross monthly rent.
Capital Expenditures
A capital expenditure is something that adds to or upgrades a property’s physical assets. So it is typically a one-time major expense. Examples of capital expenditures include a new roof, appliance or flooring.
As a good practice, you should budget approximately 10% of your gross monthly rental income to save for capital expenditures. Then when the water heater quits or other major expenses happen you will have a reserve of cash to handle the issue.
Lawn Care
Lawn care can be used to describe proper maintenance of any exterior spaces where grass, trees and living plants grow. Examples of lawn care can include mowing the grass, trimming trees and snow removal.
We always include lawn care in our tenant contracts as being the responsibility of the tenant.
Vacancy
Vacancy is the amount of time an investment property is left unoccupied. This can occur due to remodeling needs, lack of tenants etc.
As another good practice, it is important to budget in a vacancy rate. This is important for when you have a turnover in tenants and need a month or two to market and secure your next tenant. Without a tenant and rental income, you are still responsible for expenses so it is helpful to include vacancy in your budget.
Utilities – Gas, water, electric etc.
Utilities mean useful or necessary features to the home such as electricity, gas, water, cable and internet. As you draft your rental agreement with your tenant you can determine who is responsible for what utilities.
In Conclusion
I hope this list of rental property expenses gave you a better sense of all of the expenses to consider when buying your first or next rental property. Until next time, happy investing!
P.S. – If you are managing your own properties, check out our other posts about property management found below:
