When buying investment property, real estate investors should consider the costs associated with owning a rental property. Such costs will affect everything from your return on investment (cap rate and cash on cash return) to your budget and rental property cash flow. They will also determine how much you should charge for rent in order to generate positive cash flow.
So, What Are Carrying Costs?
Carrying costs of a real estate investment are those recurring rental property expenses that property owners must pay during the period of owning an investment property. Also known as holding costs in real estate, carrying costs are usually paid on a monthly basis. Real estate investors can use a rental property calculator to calculate the costs of owning a rental property.
To learn more about how Mashvisor’s Rental Property Calculator will help you make faster and smarter real estate investment decisions, click here.
A Few Examples of Carrying Costs in Real Estate
Here are some examples of carrying costs in real estate:
Rental property insurance
Rental home insurance protects property owners against liabilities caused by renters, as well as losses caused by crime or weather damage. Here are some of the factors that affect rental property insurance rates:
- The number of units
- The replacement cost of the investment property
- The condition of your rental property
- The age of your rental property
- The building materials used like wood frames and masonry
- The geographical location of your rental
- The presence or absence of safety devices such as fire extinguishers, security cameras, and burglar alarms
- The proximity to water
Besides proximity to water, having an investment property in an area that is likely to experience natural disasters could also increase the rates of your insurance policy. Amenities such as a fire pit, sauna, fireplace, trampoline, and hot tub will also affect rental insurance rates.
Vacant or unoccupied home insurance
Vacant home insurance covers rental properties left unoccupied for long periods. Vacant and unoccupied properties are not only an easy target for burglars and vandals but are also more susceptible to weather damage due to wildfires, windstorms or even frozen pipes bursting.
While the terms vacant and unoccupied are usually seen as interchangeable, some insurance companies distinguish the two. A home is considered unoccupied if it has not had an occupant for 30 or more consecutive days, but personal belongings and appliances remain in the property. Properties that usually fall in the unoccupied home category are second homes and vacation properties. On the other hand, a property is vacant if it has been unoccupied for at least 30 consecutive days, with few or no personal belongings and no appliances.
Vacant home insurance costs are affected by factors such as:
- The vacancy rate
- Presence or absence of security systems
- Property condition
- State of the neighborhood
- Replacement cost
- Property oversight
- Multi-policy discount
Homeowners’ Association (HOA) fees
If your investment property is part of a homeowners’ association, then you will be required to pay HOA fees every month. Though HOA fees usually range from $100 to $700 per month, the amount paid will depend on the property size, location, and amenities included. For example, HOA community fees in Florida are $250 on average, but in New York, it’s $650 on average.
HOA fees cover communal expenses such as:
- Maintenance of common areas like roads, spas, clubhouses, and pools
- Trash and recycling pickup
- Utilities to common areas
- Reserve requirements (money collected for future repairs and maintenance)
There are several types of HOA fees including fines and penalties, special assessments, monthly and annual assessments, and additional assessments.
Property tax is one of the major carrying costs in real estate. These are taxes levied by the local or state government on properties within its borders. Property taxes are used to fund services such as libraries, recreation parks, fire departments, transportation, and education.
Property taxes are calculated based on the value of your home. This includes both the land and the structures on it. The value is computed using either the assessed property value or the mill levy. Once the valuation of the real estate property is done, the property owner will then receive the assessment, followed up with a tax bill.
Do not forget that as a real estate investor, you can benefit from rental property tax deductions. Learn more by reading: What Rental Property Tax Deductions Apply to You?
When buying an investment property, many investors forget to factor in utilities as part of the holding costs in real estate. The costs of your utilities will be determined by the location of your income property, usage habits, age of your property, local climate, and the size of your rental property. Utilities in a rental could include:
- Water and sewer – Besides usage, your water bill is influenced by other factors such as the size of your water meter, rate structures, and local cost of water and sewage.
- Electric and gas – You can make your investment property more energy-efficient by buying energy-efficient appliances, updating caulk and weather stripping, and having your cooling and heating systems regularly inspected and updated.
- Trash and recycling – Property owners are required to pay for the disposing of their garbage, organic waste, and recyclables. Depending on your location, you can expect a monthly garbage cost of between $20 and $50.
- Internet, telephone, and cable – Signing up for cable TV, phone services or internet connection will mean paying a fee to service providers.
Property management fees
Property managers offer services such as advertising a rental property, handling leases, screening tenants, dealing with repairs, and responding to tenant emergencies. A property management fee is the monthly amount paid to a professional property management company or property manager to manage rental properties on your behalf. While some companies charge a flat monthly rate, this fee is usually about 10% of the gross monthly rent.
There are different types of property management fees including:
- Setup or onboarding fee
- Leasing fee
- Baseline management fee
- Repair reserve fund
- Lease renewals
- Advertising fee
Real estate investors need to learn how to manage their monthly carrying costs so as to avoid a negative cash flow. Being aware of your holding costs in real estate from the onset will help you plan accordingly and minimize your expenses. This will help you get a good real estate return on investment (ROI) from your positive cash flow properties.
Want to get estimates for carrying costs and see how they will affect your return on investment before you buy a rental property? Use Mashvisor’s Rental Property Calculator. Sign up now to give it a try.