Setting a budget can be challenging. If you’ve invested in rental properties, it’s a critical component for turning a profit. The key is to have a solid understanding of all potential expenses – the expected and the little surprises; the major and the minor ones that can mess with your numbers.
Fixed Expenses: Some of these are the same every month, such as your mortgage, while others, like utilities, vary, but they are still consistent, expected expenses.
- Loan payment: Unless you’re the rare bird who purchased properties with cash, you will have a loan payment. It often includes the initial repairs, remodels, updating, etc. that you invested in your property at the time of purchase.
- Property Taxes and Home-owners insurance: These two items can be included with the loan payment or paid separately. They are typically higher than the property taxes and insurance on your personal dwelling place.
- Utilities: This includes gas and/or electric, trash removal, and water and sewage. In some cases, the tenant is responsible for these expenses, but then rent rates reflect it. If you choose to give this responsibility to your tenant, you still need to budget a certain amount to cover the cost during vacancies or when the tenant fails to pay.
- HOA: If your rental property is a home in a subdivision with a Homeowners Association, you will also have monthly (or annual) membership fees.
Variable Expenses: These are the expenses that you know will come up from time to time, but predicting the time and amount is difficult. Setting aside an adequate portion of your cash flow for these expenses is critical.
- Maintenance: Upkeep and the eventual replacement cost of items discussed in our previous blog, Managing the Cost of Maintenance.
- General repairs: This includes less costly items, such as repairing an appliance or replacing a ceiling fan, window screen, or interior door.
- Vacancies: Vacancies happen, not only creating the cost of preparing for the next tenant but also failing to produce cash flow. Retaining long-term tenants is essential, of course, but a challenge to attain.
- Office and business: This includes office supplies as well as the cost of paying someone to answer the phone, show properties, collect the rent, manage the books, etc. It also includes legal fees, eviction fees, customer appreciation costs, and more.
There are ‘formulas’ and guidelines to help you budget accurately. Some experts recommend setting aside 12- 15% of the monthly rent for maintenance and repairs. Others suggest following the 50% rule, which retains 50% of rental income for all expenses except the mortgage. The remaining 50% covers the mortgage first and leaves the rest as your net income. If you want to make extra payments on your mortgage principal or invest in additional properties, it will come from your net profit. Budgeting software can be a big plus in managing your investment properties. Capterra offers an overview of top choices in property management accounting and budgeting software.
Another option is connecting with Rentals America Property Management company. We take the stress out of property management. Our team offers a full range of property management services tailored to you as an investor, homeowner, or landlord. Contracting with Rentals America to manage your properties brings you multiple benefits, including:
- No hassle management
- Automated owner statements
- Online Owner Portal Access
- Industry-leading marketing tools
- 24/7 maintenance request handling
- Prompt Response to Tenant Requests
- Low vacancy rate
- Low time on market
- Industry-specific local knowledge
