Even if the seller of the property doesn't have these expenses available, it's easy to find out what they will be. You can look at property tax records, get insurance quotes, and talk to rental property management companies and other service providers.
When calculating rental property expenses, you'll want to get a good idea of what the property taxes will be after you purchase it, since there's a good chance they will increase after the sale. You can talk to the tax assessor or look at how property taxes have changed after other properties in the area have sold.
If your plan is to improve the property after purchasing it, raising the fair market value of the real estate is also likely to have an effect on the property taxes and insurance.
You'll also want to find out if there have been any insurance claims during the current policy period. If there have been, you may end up paying more for insurance.
Variable property expenses include costs that may change each month or each year. These expenses may be more difficult to estimate, but with experience in real estate investing you will start becoming more accurate in your predictions. In the meantime, you can talk to other real estate investors or the property management companies in the area. Variable expenses include:
While not technically a cost, real estate financing is something to consider. The monthly mortgage payments you'll have to make each month will affect your cash flow, so even if the rental property has a positive net income, you may find yourself coming out of pocket each month if it's not high enough to cover the loan payments on your rental property.
Rental property analysis
Once you have your rental property expenses figured out, you'll also want to figure out the rental income you can expect to get. You can learn how to do that in our guide on determining fair market rent.
The next step is putting it all together to find out whether the property you're looking at will be a good investment. It's a simple formula:
Gross rental income - expenses = net income
You can use a rental property calculator to do the math for you, or you can use a rental property expenses spreadsheet. Either of these options will let you adjust expenses and rental income to see how it will affect your return on investment. When doing this, it's usually best to be conservative. Estimate your rental income on the lower end and your expenses on the higher end. If it still makes sense estimating it that way, it's probably a safe investment.
You can get more details about this with our guide on rental property analysis.
Property expenses and tax deductions
Many real estate expenses are also business tax deductions. If you understand how taxes work for residential rental properties and keep detailed records, you can maximize your tax savings and keep more of your rental investment income. The IRS gives great advice on rental property expenses. You can also review IRS Publication 527 for even more information.
As a real estate investor, it's helpful to have a checklist of common rental property expenses to use during due diligence on a residential rental property. This will make sure you're not missing anything when you're ready to make a real estate investment. This checklist is also helpful when owning rental property to help keep track of each rental property expense.
Carefully tracking your expenses will allow you to calculate rental property performance to help ensure you keep a positive cash flow, and it may even be a requirement of your real estate financing company.
You will also need detailed rental property expense records to take advantage of your business tax deductions. If you choose to go with a rental property management company, they can usually provide very detailed property expense records for you.
List of common rental property expenses
- Property taxes
- Property insurance
- Interest expense
- Marketing and advertising expenses
- Property management costs
- Materials and supplies
- Maintenance and repairs
- Pest control costs
- Landscaping and snow removal
- HOA fees
- Special assessments
- Vacancy cost
- Turning over units for new tenants
- Capital expenditures
- Legal and accounting fees
- Evictions and collections
- Rental licenses and permits
- Real estate agent commission
The bottom line
Real estate ownership can be very financially rewarding, but real estate investing is more than just a passive investment; it's a business. And just like in any other business, you have to carefully track all of your income and expenses to ensure you stay profitable and can continue to grow.
As a real estate investor, you don't want to get lazy when it comes to monitoring your expenses. You should regularly review your rental property expenses to see whether there are any opportunities to save money. Pay attention to the details, and you can have a successful real estate investment business.