Racking up the Expenses

So often people think that all landlords are making a killing off of their tenants. They see how much they are paying in rent and think, "My landlord is stealing from me to get rich quick!” This however is not entirely true because they fail to see and understand all that goes into owning a property.

Real estate investing is a lot of work. There is constant maintenance to be done and most landlords have their tenant's best interests in mind. Like in any group of people there are a select few bad ones that give a bad rep to the rest of the group. This type of person is a slumlord and owns properties that are in the worst of conditions. I have no intention to come anywhere close to this type of landlord and I believe that many other investors feel the same way.

It is a false misconception that the profit real estate investors get is the rental income minus the mortgage payment on a property. Simply put:

However, this is NOT TRUE because there are many other things to consider than just the mortgage. Here is a better representation of the expenses of a property.

It is necessary to account for all of these expenses each month or else you will be left with a large bill at the end of the month and may not have enough to cover it. Some of these items you may recognize like lawn care or property taxes but others you may not know that much about. Let me explain further.

Vacancy

Accounting for vacancy is incredibly important because it is possible that your property will not be rented 100% of the time. A tenant might leave early or you may just struggle to find the ideal tenant for your property. This is why it is necessary to have some money in reserves to account for these times so you are left high and dry. Typically it is safe to allocate 5% of the rent to go towards this expense.

Repairs

It is guaranteed that something in your property will break at some point. Why not be prepared for it? By setting aside 5% for repairs each month, a sneaky broken faucet will not catch you off guard.

Capital Expenditures

Capital Expenditures or CapEx for short are the large ticket repairs that don’t occur that often. These are items such as the roof or the HVAC unit. A breakdown of these expenses is listed below. Each item has a different lifespan and cost so it is important to allocate for that.

Property Management

Even if you are planning on managing your own property it is still important to run the numbers with this as an expensive. One day down the road you may decide you don’t want to deal with tenants anymore and would rather sit on the beach and collect your money. If you analyzed the deal with property management then you should be all set to go but if not, you may be forced to continue managing the property. If you are managing the property now you can look at this as another pay check to yourself for the work you are doing. It is smart to set aside 11% of the rent towards property management but your local management company may charge more or less. Give them a call and see what your local market charges.

By adding up all of these expenses and then subtracting it from the rent, then you will have an accurate idea of how the property will perform. Taking the time to figure out all of the expenses and doing the necessary math will prevent you from buying a bad deal all while saving time and money!