An essential part of investing in rental home ownership and property management is knowing how much it will cost you to maintain your investment. A property that costs more to maintain than it earns just isn’t sustainable.
Negative income flow is often the reason people decide to sell their rental properties, which can result in even further loss. That’s why it’s so important to know the costs and have a budget for them prior to purchasing a property.
The industry standard
There are many ways to estimate how much property owners should have saved each year for maintenance. The most accurate way to do this is to create an estimated budget.
By creating a budget, you will have an accurate estimate of how much you will need to cover the costs of ownership. This includes repairs, replacements, or any other maintenance related to your rental property.
Fixed property expenses
These are the expenses that you will have to pay regardless of whether or not you currently have tenants. They are the basic costs of homeownership that you will have to pay every month, which will make it easier to include in a tentative budget.
There are many advantages to hiring a property management company. They can be invaluable when it comes to things like applicant screening, collecting rent, and dealing with delinquencies. They can also handle assuring that routine maintenance, as well as any landscaping needs are completed.
They are particularly beneficial if you don’t live near the property you’re planning on renting out, if you’re considering a multi-family home with multiple units and tenants, or if you have limited time to manage the property yourself.
You’ll want to shop around to choose the right company to fit your needs. Not only should pricing be a consideration, but you also want to be certain that whoever you decide to go with has a good reputation, and a proven track record in successful property management.
To find out the current property tax amount, contact the county assessor. They will be able to provide the exact amount you’d be paying currently. Also, after closing escrow, make sure you are aware of the property tax you will be paying, as it can vary greatly from what the seller is paying.
It’s worth noting that property taxes can change significantly over time. What you pay now may not be what you pay next year. Factor additional money into the budget for increased property taxes down the road.
While tenants typically pay for their own utilities such as electricity, gas, and water, properties like multi-family homes may require additional utility costs. As an example, if you’re thinking of purchasing an apartment building, then you’ll be footing the bill for things like outside lighting, such as the parking lot.
You’ll also want to factor in the cost of utilities when the home is vacant. This could be for a brief, or extended period of time. You may know well in advance of the vacancy, or it could happen suddenly. For these reasons it’s best to have money budgeted for this cost at all times.
Pest control is a mostly preventative cost. Typically it will include the application of pesticides in and around the property. To ensure a tenant’s safety and comfort, a property owner must be prepared to take care of any infestations that occur as swiftly as possible.
It’s always best to get quotes from a few reputable companies. It may seem like your least expensive option is the best way to go, but this clearly will not always be the case. While most pest control companies will largely offer identical services, things like reliability, turnaround time, and thoroughness are extremely important.
If possible, choose a company that offers after hours or on-call service in case of an event like a rodent or other pest infestation that might need immediate attention. Keep in mind that this will usually be subject to an additional charge, or require a contract.
Waste management, landscaping, and shared use
The landlord is responsible for coordination of regular trash collection, any landscaping needs, as well as cleanliness and maintenance of any shared use areas, unless otherwise stated in a rental agreement.
In some areas waste management may be included with other utilities such as water. In the case of a single family home, this cost may be passed on to the tenant. However, if you’re purchasing a multi-family property that requires commercial waste and recycling pickup, you will be on the hook for those costs.
As with waste management, landscaping costs can vary depending on the type of property you’re considering. With a single family home, the tenant may be responsible for mowing the lawn and maintaining any outdoor vegetation. Whereas a multi-family property will undoubtedly require professional care for any greenspace.
It is the landlord’s responsibility to keep any shared use space clean and well maintained. For instance, if you choose a building with a lobby, you’ll need to make certain that it stays clean. This could require hiring a professional cleaning company.
Variable rental property costs
Now that we’ve gone through the common fixed property expenses, let’s talk about some of the variable costs associated with owning a rental property that are often overlooked by first-time landlords.
These are the portions of your operating budget which vary according to your geographical specifics or occur less frequently, such as seasonal concerns and repairs.
The fact of the matter is, your property won’t be rented at all times. There will be occasions when your rental home is vacant.
This will not only cost you more with additional expenses like utilities, but you’ll also be faced with a temporary reduction in income. These periods should be factored into your budget.
There are a few ways to calculate vacancy rate and what it can cost you. There is a simple way to look at it. Each month that your property is vacant equates to a loss of 1/12th of your annual income, or 8.3%. That’s no small amount, so it absolutely must be budgeted for.
The amount you will spend on seasonal maintenance will be dependent on the location of the property. Seasons are different from region to region, and so are the costs associated with maintaining a home.
If your rental property is in an area with harsh winters, you may have to pay for things like snow removal, or winterizing the home. Or you may be in an area that is more susceptible to weather events like hurricanes, wind storms, or perhaps tornados.
When budgeting for seasonal maintenance it’s important to consider all costs. Not just what you may have to spend in preparation, but also any repairs that may be necessary as a result of a particularly harsh season.
Appliances and non-standard maintenance
More often than not, an owner provides most appliances when renting their property. This includes not just the upfront cost of appliances like a refrigerator, dishwasher, and possibly a washing machine and dryer, but also any maintenance involved with keeping them in working condition.
In addition, it’s vital to make sure that the air conditioning and heating unit, along with the hot water heater are in working order. Regular maintenance of these items to keep them in proper working order will help to avoid an uncomfortable or dangerous situation for your tenant.
Non-standard maintenance involves situations that may arise due to unforeseen circumstances. An air conditioner failing during a heatwave, or pipes bursting during a hard freeze. Even with proper preventative maintenance these incidents can occur, and will require a rapid response. A landlord must have a plan in place and funds available for emergencies.
The bottom line on rental property maintenance costs
There are many costs involved with rental property ownership that go far beyond the initial cost of the home. When you really get down to details and create a realistic budget, you will have a far better idea of what you’ll be able to afford. As a result you will be far more resilient as an investor.
This is a great place to be, as renting out a property can provide steady income and help you increase your initial investment. Real estate isn’t necessarily dependent on the stock market or other commodities, so even if certain sectors suffer, you still have the ability to create positive cash flow.
Rental property ownership can prove to be a very lucrative and rewarding venture. With the right knowledge and planning, you can be well on your way to success as a rental property owner.