When buying a rental property, real estate investors have to go above and beyond to find every little crack in the ceiling and every little drip from a faucet! It only makes sense that they should make space for rental property expenses throughout all these calculations. Keep in mind that factoring in rental property expenses is a big part of conducting a real estate investment analysis.
What are rental property expenses that real estate investors should always account for?
Interest payments!
Interest is one of the often-forgotten rental property expenses. It doesn’t matter what type of loan you end up getting when buying an investment property, you will have to pay interest! Of course, interest costs can differ along with the type of mortgage you end up going for. In the case of an adjustable-rate mortgage, real estate investors can not fully predict what rate their interest will be going for. This is mainly connected to the fed-funds rate. So, make sure you do your research on investment property mortgage rates before starting to invest in real estate.
For more information on investment property mortgage rates, read this blog post: Investing in Real Estate: What Rental Property Mortgage Rates Can You Expect in 2018?
Your own time
Real estate investors have a great competitive advantage over other types of investment ventures! It’s doing things by their own hand! A valuable tool for making money in real estate! Real estate investors perform maintenance, screen tenants, manage properties, and more often than not, do their own landscaping. All these jobs fall within the job requirements of the average real estate investor.
So, don’t forget to factor in the costs that arise from you performing these jobs!
Maintenance costs
For a beginner real estate investor, everything might seem all fine and dandy with your first investment property. As time goes by, the property needs painting, the kitchen might need a paint coat, or the fridge is simply outdated. For all these tasks, you will probably need to hire a professional to get the best work done in the most efficient manner. Additionally, not accounting for maintenance costs can flip your investment calculations sideways!
In any case of real estate investing, making money in real estate requires you to factor in these recurring rental property expenses. Otherwise, you can end up losing money or find yourself in a jam with a negative cash flow income property! A situation where the most successful real estate investors can have difficulty getting out of!
Property management costs
If you’re looking into buying an investment property, then you’ve definitely heard of an often-forgotten rental property expense called management costs. Hiring professional property management may not be a feasible option for all real estate investors. On the other hand, if you’re going for out-of-state real estate investing, it might be your only option to manage your investment property. Another situation where you need a property management company is when you expand your real estate investment portfolio and you simply cannot manage the bulk of the investment properties by yourself. So, make sure to factor property management costs just as you would account for utility costs.
In any case of buying a rental property, real estate investors will have a choice between long-term rentals and short-term rentals. Whichever one you choose will determine the percentage that your property manager takes. Keep in mind that short-term rentals or Airbnb rentals go for a higher percentage when property management is needed.
Wondering if you need property management? Read this blog post to get the gist: When Should Landlords opt for Professional Property Management?
Closing costs
Closing costs are an inevitable truth that no real estate investor can avoid! When buying an investment property, a real estate investor is going to have to submit an offer on the property. In which, the property owner will review it and decide on accepting or refusing. To make things more appealing for the property seller, real estate investors often take on closing costs.
Here are a few common costs to expect when buying a rental property:
- Property inspection
- Title fees
- Appraisal fees
- Attorney fees
- Notary fees
- Credit report fees
Some of these costs can be taken on by the property seller; it depends on the initial agreement when the offer is accepted.
Wondering about more details in regard to closing costs? Read this blog post: Buying an Investment Property: Do Buyers or Sellers Pay the Closing Costs?
Property taxes
Property taxes are the rental property expenses that no real estate investor, no matter how smart he/she is, can escape! If you’re buying an investment property after years of owning your own home, expect things to be different with your investment property tax bill. If you’re a new landlord, you must factor property taxes with your rental income. Make sure you’re putting enough money aside to cover your property taxes.
Marketing expenses and vacancy costs
These rental property expenses come with the territory. Most investment property calculators account for marketing and advertising expenses as well as vacancy costs for the rental property. Just make sure you find the most effective methods to advertise your rental properties without breaking the bank!
More often than not, real estate investors have to experience vacancy at their rental properties. Whether you own short-term rentals and vacation home rentals, or you own multiple traditional rentals, vacancy is a cost you will have to endure! In any case, real estate investors account for 5% vacancy rate with long-term rentals and an even higher number that reaches 50% for short-term rentals.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
Unplanned repairs
Unplanned repairs are the mother of all rental property expenses! If you already own rental properties, then you know how suddenly things can stop working. The water heater might stop heating, the gas pipes might have a leak, or the washing machine might just washing. These unplanned repairs are a must and no tenant can live in a property without attending to them first! For that reason, real estate investors must set aside a budget for such rental property expenses in case they arise.
Upgrading costs
After owning an investment property for a certain number of years, any landlord is going to need to perform some remodeling and refurbishing of the interior of the property. This counts as an effort to keep the property in tip-top condition as well as upgrading it to attract more rental income. These costs can be accounted for through a percentage of the monthly rental income. So, make sure to factor them in when you start getting those rent checks.
The bottom line
No real estate investor can avoid such rental property expenses! In any case, a real estate investor can downsize his/her operation to cut down the costs, but if you’re trying to grow a real estate investment portfolio, increasing costs kind of tag along with the profits! So, start real estate investing smartly and make intelligent real estate investment decisions!
If you have any more insights, please share them with us in the comments section!
