Investing in rental properties is one of the best ways to make money for a number of reasons. One advantage is that the returns are predictable. However, when analyzing a potential investment property, estimating only the rental income potential could be a huge mistake. For you to get a comprehensive picture of the profit potential, you should assess the potential cash flow by estimating rental property expenses and deducting them from the expected rental income.
Most real estate experts recommend that you only invest in positive cash flow properties, especially if you are a beginner real estate investor. A positive cash flow property will pay for itself, is more attractive to lenders, and will help you build your investment portfolio faster. Many investors actually end up selling their rental properties because of negative cash flow. Therefore, estimating rental property expenses before you buy is important if you want to avoid such as a scenario.
Keep reading to learn about the best tool for estimating rental property expenses accurately and quickly.
Estimating Rental Property Expenses Before You Buy: What’s the Best Way to Do It?
To accurately evaluate your cash flow potential and determine if a rental property is worth buying, you should understand how to estimate rental property expenses and rental income. And to make a wise investment decision, you have to get the numbers right. If you get them wrong, you risk losing money. Therefore, doing proper research is important. You should never believe the rental property expenses the property seller gives you without doing your own due diligence.
Apart from the cost of purchasing the property, there there are several costs associated with managing a rental property that a real estate investor needs to estimate and budget for to avoid surprises later on. Getting a pretty accurate estimate of the expected rental income is quite easy since you simply look at rental comps. However, estimating rental property expenses is much harder because there are many hidden costs of owning a rental property. The expenses will also tend to vary from property to property.
Related: 5 Risks That Come With a Rental Property and How to Mitigate Them
There are several methods for estimating rental property expenses. For instance, you can talk to landlords and property managers in the local market and ask for their rental property expenses list. However, this method demands a great deal of time.
Some investors use the 50% rule, which stipulates that the standard rental property operating expenses will be approximately 50% of the rental income. However, this rule excludes some expenses such as mortgage payments, HOA dues, and property management fees. It’s often just used as a starting point to get a rough estimate of the rental expenses. If you want to get an accurate estimate of rental property expenses quickly, the best way is to use Mashvisor’s rental property calculator.
Using Mashvisor’s Rental Property Calculator to Estimate the Expenses of a Rental Property
The rental property calculator is one of the real estate investment tools offered by Mashvisor. The most successful investors use reliable real estate investment software like Mashvisor – instead of traditional methods – to analyze multiple deals at the same time.
Mashvisor’s investment property calculator provides real estate investors with all the key rental data and analytics they need to decide whether or not to buy an investment property for sale in the US housing market. You don’t have to spend weeks collecting data on investment properties and markets as all the legwork has already been done for you.
When it comes to estimating rental property expenses, the rental property calculator can do so within minutes. This can save you lots of time and effort and make your life as a real estate investor more convenient. With just a click of the button, you can estimate rental property expenses for any investment property for sale on the platform or an off-market property whose address you enter.
On the Expenses section of the property analytics page, you’ll see the rental property’s one-time startup costs and monthly expenses (Airbnb and traditional). These values are based on the average costs and expenses for the local market.
Here are the main rental property expenses that will be included in our investment property analysis report:
Mashvisor’s Estimation of Startup and Recurring Rental Expenses
One-Time Startup Costs
These are expenses that you only incur once when you buy the investment property. You should have enough funds to cover these costs by the time you are doing the purchase.
They include:
- Inspections
- Repair cost
- Closing costs
- Furniture and appliances
Monthly Expenses
These are rental expenses that you will incur monthly or on a regular basis once you become the owner of the rental property. Therefore, they will have a huge impact on your monthly cash flow.
They include:
- Property tax
- Rental income tax
- Insurance
- Maintenance
- Property management
- HOA dues
- Utilities
- Marketing
It’s important to note that while the values given by Mashvisor’s rental property calculator are very accurate, they might not represent the actual rental property expenses that will apply to your investment property. Therefore, it’s recommended that you conduct some research on your own to determine expenses that may be unique to the specific property you are analyzing. The good thing with Mashvisor’s rental property calculator is that it allows you to modify and add custom expenses as you see fit. The changes you make will be reflected in the cash flow, cap rate, and cash on cash return calculations in real time.
Mashvisor’s Rental Property Analysis
The Bottom Line
If you are looking to buy a rental property, estimating rental property expenses is an essential part of determining ahead of time if a rental property for sale will turn a profit. While there are many ways to do it, most of them are time-intensive and/or may not provide accurate results. If you want to find the best real estate deals, be sure to use Mashvisor’s rental property calculator as it will give you highly accurate cost estimates in a matter of minutes. You will also be able to see how the expenses affect your potential cash flow, cap rate, and cash on cash return.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today and enjoy 15% off afterwards.