Rental Property Expenses

[Josh Corby]

Hey guys! Can someone provide a breakdown off all the expenses involved with managing a rental property. I understand the basic expenses such as PITI. However, I'm struggling when accounting for maintenance costs and other miscellaneous costs and what percentage of the rent I should budget for each. Thank you guys, I really appreciate it!

[Tim Johnson]

Hi @Josh Corby, along with the mortgage payment, there are usually vacancy rate, property taxes, insurance, your share of utilities, capital expenses, maintenance, and property management fees to consider. Of course, if your mortgage payment is PITI (including taxes and insurance) you can nix those from the above list....and likewise, if you're managing it yourself you can lose the prop management fee.

When I don't know much about the property and am just crunching numbers I'll use 8-10% for vacancy rate, 8% for property management, and 5% for each of capex and maintenance (total of 10% for both).

If I know the property is new construction I'll use a smaller number for capex and maintenance - if the property is old, I may figure a bit more. Then, as you get a chance to actually see the property you can hone in on those numbers and even add "initial renovation costs" as a one-time figure.

[Jordan Fulmer]

Property management typically charges 10% of the monthly rent. 

We usually set aside 15% for vacancy and maintenance in a reserve account that fills up until needed. You won't use it every month, but when a sizeable repair comes up, you'll be glad it's there.

[Michele Fischer]

In some areas you may have snow removal, and if it is a duplex or multi you will likely have yard maintenance.  For years we planned on 4% of rent to be uncollected (tenant still living there but not paying for whatever reason, or empty unit), but have increased it to 8%.  We have only had one eviction, but we budget/incur 3-6% of rent to get units rent ready (turnover) and another 3-6% of rent for maintenance/capital improvements.  Hope that helps a little.  It can vary quite a bit year to year, but as you get more properties and/or more years it starts to level out more.  You always want a healthy buffer to cover things since they won't be steady month to month or even year to year.

[John T.]

@Josh Corby You may wish to review the 50% Rule:

The 50% rule recognizes that throughout the United States, operating expenses run 45% to 50% of the gross rents for rental properties. Operating expenses include all the expenses that are associated with operating your rental business, but DO NOT include the mortgage payment (principal and interest and PMI). Operating expenses include (but are not limited to): taxes, insurance, management, maintenance, entity maintenance, advertising, utilities (at least during vacancies), legal fees, damage done by tenants (over the security deposit), vacancies, setouts, lawsuits, and capital expenses (not technically an operating expense).

Stated another way, the 50% rule, which is generally considered to be fairly close to actual expenses, states that …

50% of your gross rents will be taken up by expenses, such as
property tax
insurance
vacancy
property management
maintenance
capital repairs
legals and accounting.

From the remaining 50% you service your debt, if any, and the remaining is your profit. It is a guideline. After a number of years you will get an idea of the percentage of expenses for your property, but experience shows it will be close to 50%. Note that private mortgage insurance (PMI) is part of the debt service.

Another way to look at the 50% rule is to consider the FOUR COSTS ASSOCIATED WITH HOLDING A RENTAL PROPERTY

1 - RENT LOSS

Vacancy
Non-Payment

2 - CAPITAL COSTS
Capital Costs

3 - EXPENSES
Property Taxes
Insurance
Maintenance
Property Management
Turnover Costs
CPA/Attorney
Utilities
Lawn Care
Etc.

Rent Loss, Capital Costs and Expenses equal approximately 50% of gross rentals

4 - DEBT SERVICE
Principal
Interest
Private mortgage insurance (PMI), if any

Your PROFIT remains after deducting the FOUR COSTS ASSOCIATED WITH HOLDING A RENTAL PROPERTY

Here are two books you might buy and use in your rental business:

1.  What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures, Updated     Edition by Frank Gallinelli

2.  Real Estate Investor's Guide to QuickBooks Desktop or Real Estate Investor's Guide to QuickBooks Online, both books sold by Online Accounting

[Bud Gaffney]

@Josh Corby don’t forget budgeting for capex

[John T.]

@Josh Corby Many of the other posters have thoughtfully suggested that you budget money for expenses and capex.

I agree.  You should establish reserve accounts to pay for inevitable operating expenses and capex. I budget and fund each account on a monthly basis. I use four reserve accounts:

Tax Reserve - to pay real estate taxes
Insurance Reserve - to pay for Landlord's Insurance and Umbrella Insurance
Replacement Reserve - for capital expenditures (I sometimes use it for maintenance and repair expenses also)
Other Savings Reserve - a contingency reserve