One cannot underestimate the importance of planning in determining success in the rental property industry. However, setting a budget can be tricky for new investors heading into the market. To avoid being blindsided by expenses that could eat heavily into profits, every landowner must have some background in budgeting for rental property.
You will incur several types of expenses, including maintenance fees, inspection costs, property taxes, and so on.
So if you’d like to learn how and what to consider when making a rental property budget, keep reading till the end of this article. While this isn’t an exhaustive list, it will give you a general idea of what to expect, and prevent you from beginning your investment journey blindly.
- Account for fees
Rental investment is often associated with different types of fees from the moment you start financing till even after you own the property. Before brushing up on your investing strategies, ensure you have enough capital to support your acquisition of a rental property. Some of the costs you should anticipate before closing a sale include an appraisal fee, which you pay to a licensed professional to assess the value of your home. Note that this is different from the inspection fee you pay for an inspector to reveal any hidden damages resulting from mold, water, and pests. At this stage, you should also consider the cost of home insurance.
After you’ve financed your investment, you’ll also have to settle the expense of property taxes. This fee is dependent on your jurisdiction, as that determines the market value of your house. You’ll find that most of these costs are also dependent on the size of the rental property. So a single-family unit will cost less than a multi-family rental; with that in mind, plan appropriately.
- Consider maintenance
Maintenance is an unavoidable cost when you’re a landowner. While proactive measures such as proper tenant screening and regular inspections can reduce costs, your budget is not complete without a maintenance allowance. Ideally, it should cover expenses such as plumbing repairs, garbage collection, landscaping, and other similar services.
Unfortunately, there’s no one size fits all for maintenance costs. Some months may be uneventful, while others might feel like your property walked through a landmine with simultaneous damages entering the picture. However, you can rely on expert recommendations till you find something more tailored to you. A popular method investors use is the 1% formula, where you anticipate your maintenance cost as a single percent of your home purchase price. Another estimation is the square footage formula which budgets $1 for every square foot of the property.
- Weigh your marketing and tenant screening
A common misconception new investors have is that finding good tenants is easy. On the contrary, actively putting your ads in the right place and screening for the perfect tenant can be demanding. If you want your investment to start turning a profit quickly and regularly by installing responsible residents, you might need some help.
Determine if you’ll stick to traditional media such as newspapers and magazines, or expand into digital marketing. While sites let you list the property for free, you’ll have to consider a hosting fee if you want to sign up on popular websites like Airbnb. If you plan to post on social media, you could also opt for paid ads with a broader reach.
Of course, putting your property out there and attracting several prospects does you no good if you can’t weed out the shaft. So you might also want to account for consulting The Fair Trade Reporting Act, which lets you run credit checks for prospective renters.
- Speak with utility companies
Another inescapable cost with rental properties is utilities. As a property owner, keeping the lights on and water running is part of your responsibilities. This expense may vary according to the type of arrangement you have with your tenants. If it’s one where the tenant covers most of the cost, then utilities can come down to lower than $100 a month. Still, it’s in your best interest to speak with utility companies and determine the range you should expect to pay.
If you plan on including other amenities like laundry and internet, you would need to consider the cost of installing a laundry machine or a router.
Real estate can be a vehicle to drive you to financial freedom, but it could also easily wipe out your savings if you take on more than you can chew. Hence, the importance of having a budget.
While there are other upfront fees to consider, this article covered most of the common ones you can expect. Property owners too busy or who find managing their rental property too tedious can include property management expenses in their budgets. These professionals can help with marketing, tenant screening, and other services.