You should estimate the expected rental property expenses before buying a rental property.
Why is this important? Because the expenses directly impact the rental property cash flow. When they are more than your rental income, you have a negative cash flow. That means the rent does not cover the expenses and you are losing money on this rental. If the rental property expenses are less than what you earn as rent, you have a positive cash flow. You are able to pay for all costs every month and still pocket a profit. That is the goal of every real estate investor.
Knowing what rental property expenses to expect, you can choose the best financing method for the real estate investment, the right rental strategy, and you can accurately calculate how much to charge for rent.
Rental Property Expenses to Keep in Mind Before a Purchase
Upfront costs you will have to pay when buying an investment property
- Appraisal fee – when you apply for a mortgage, the lender asks for an appraisal as a proof of the value of the investment property in order to set the amount of the loan they can give you. It costs between $300 for a single-family home to $600 for a multifamily property.
- Home inspection – it is in your own interest to get a home inspection before buying a rental property to make sure the condition is as advertised. This costs between $200 and $500.
- Closing costs – these are the costs of legally buying the property such as mortgage application, official recording, and so on. They are in the range of 2-5% of the property’s price.
- Mortgage payments and property taxes – they are usually paid together. Property taxes vary from state to state, from 0.18% in Louisiana to 1.89% in New Jersey.
- Insurance – it is required by mortgage institutions.
- HOA dues – check if there is a homeowners association active in the residential community where you are considering investing in real estate because you will not only have to pay a fee as a member but also play by its rules, which might restrict some of your plans for renting.
- Rental income tax – rental income is taxed like other types of income so it depends on your tax bracket. The good thing is that all of these rental property expenses we are talking about here are tax-deductible!
- Permits or licenses – it’s possible that, in your town or city, you need a business license to run a rental property. They are expenses for rental properties you cannot skip.
- Property management fees – if you hire a professional property manager, it would cost 8-12% of the monthly rent. If you decide to do it on your own, also factor in the cost of your own time.
- Property maintenance – there are ongoing rental property expenses like mowing the lawn, fixing a leaking pipe, winterizing the property, etc. That is why keeping 1% of the value of the property as a maintenance fund is a good practice.
- Utilities – as a landlord of a long-term rental, you typically do not pay the monthly bills for electricity, water, gas, etc. They are the tenants’ responsibility. However, if you are an Airbnb host, it is on you so keep in mind that short-term rentals typically have larger utility bills because tourists are less responsible in their consumption when it is all included in the price.
- Cleaning fees – this is a big part of Airbnb costs because it is due at every check-out and sometimes during a longer stay. Do not forget to account for your time if you do it yourself. Or you can add an extra cleaning charge on top of the nightly Airbnb rate if you hire someone.
- Upgrades and emergency budget – sooner or later, you will need to get a new water heater or redo the roof. It may not be a monthly expense, but it is a good idea to have some money set aside. Upgrades will also let you increase how much you charge for rent so an investment in it is worth it.
- Vacancy costs – these are due to the lack of rental income a percent of the time. The occupancy rate is how often you have tenants or Airbnb guests. The vacancy rate is the opposite – how often your investment property is not rented or booked. So when planning your cash flow and rent price, calculate it so it covers the empty days or months.
Let’s now look at how to estimate rental property expenses. Of course, it is hard to know every detail beforehand, especially as a beginner real estate investor. But you can use the values and percentages mentioned above to do a rough calculation on the investment property you are considering.
Then, do a little market research. How much do cleaning services cost in the area? Do you need an Airbnb permit? What are the average utility bills for similar rental properties? Work with the listing price of your chosen rental property and do basic math on mortgage payments and insurance, using bank websites. This will give you a better understanding of the size of rental property expenses to expect. But if you want to make a fully informed decision, we recommend using an accurate tool.
Mashvisor’s Rental Property Expense Calculator
The rental property calculator analyzes the potential cash flow properties can bring. It automatically draws rental prices and rental property expenses data from rental comps and gives you a breakdown for both Airbnb vs traditional renting. Typically, the cash flow is very different depending on the local housing market, fees, utility costs, additional Airbnb costs, etc. Some locations are good for Airbnb investments and others are better for long term rentals.
This way, you see which is the better rental strategy for this particular property and how much to charge for rent. You can add custom expenses, too, to make the calculation even more accurate.
And this is only one part of Mashvisor’s investment property analysis tool. It enables you to analyze and compare rental properties for sale based on their price, expected rental income, cap rate, rate of return, and even occupancy rate. You can add a property with its specifications to analyze or you can search Mashvisor’s database by certain criteria. Thanks to all the data Mashvisor provides, it is easy to estimate your future expenses and find positive cash flow properties.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.