Finding renters and collecting monthly rent are only two aspects of renting out your home. Preparing for all essential and unforeseen rental property expenses is an important part of being a successful landlord.
However, learning how to budget and plan for rental property expenses is easier said than done for new landlords or investors. There are a plethora of useful online ROI calculators for calculating revenue and profits, but at the same time predicting expenditures entails a lot of variables that landlords often overlook.
Before searching for a different rental property to invest in, you need to have a good idea of the costs involved, both initially and ongoing. Whether you’re a first-time landlord or have been in the business for a long time, knowing how to budget and plan for rental property expenses will save you a lot of money in the long run!
Rental Property Expenses to Consider
As part of figuring out how to budget and plan for rental property expenses, it’s a good idea to calculate your prospective recurrent expenditures before purchasing rental properties, so you’re prepared from the outset.
It’s not difficult to estimate how much money you may make from an investment property. It’s a little more difficult to keep track of all of the different expenditures, especially if you’re new to rental property investment.
Here are a few of the things you’ll need to budget for as a landlord.
- Property management fees
- HOA dues, taxes, and insurance
- Repairs and maintenance
- Rental property loan and closing costs
- Legal fees
- Marketing and tenant screening costs
- Emergency costs
- Periods of vacancy
Keep these rental property expenses in mind throughout your entire journey as a landlord. You never know what costs might pop up.
How to Budget and Plan for Rental Property Expenses using Standard Rules
You expect to make money when you invest. Rental revenue often accounts for a large portion of a real estate investor’s return on investment. Determining which property will provide a positive cash flow can be difficult when looking for a profitable acquisition. Here are two basic guidelines to follow:
The 1% Formula
In real estate investing, the 1% rule compares the price of an investment property to the gross revenue it will earn. The 1 percent rule states that a potential investment’s monthly rent must be equal to or less than 1% of the purchase price.
The 1% rule is easy to apply. Simply multiply the property’s purchase price by 1%! The outcome is the bare minimum in monthly rent. If the property requires any repairs, include them in the computation by adding them to the purchase price and increasing the total value that you multiply by 1%.
Here’s an example of a house with a purchase price of $200,000:
$200,000 x $0.01 = $2,000
Using the 1% guideline, you should look for a mortgage with a monthly payment of $2,000 or less and charge your renters a minimum of $2,000 in monthly rent.
The Square Footage Formula
The rentable square footage is calculated by adding your usable square footage to your pro-rata portion of the building’s shared spaces. To figure it out, you’ll need to calculate the full rentable area and total usable space of the building.
Imagine a 25,000 square foot building that has 21,000 usable square feet and 4,000 square feet of common area. If you had a 2,100 usable square foot space, you would find your pro-rata share by dividing 21,000 into 2,100 to find that you have 10% of the building.
That is your pro-rata share.
Then, you multiply the total common area by your pro-rata share of 10%. This calculation gives you your share of the common area: 800 square feet. The 800 sq ft. of the common area plus 2,100 sq ft. of the usable area gives you a total rentable square footage of 2,900 sq ft.
Loans for Landlords
If you’re looking for a way to ease cash flow issues when inevitable unexpected expenses arise, there are plenty of loans available for landlords. It’s essential to talk with multiple lending providers to ensure you’re approved for the most and getting the best interest rate available.
As a real estate professional, you understand that loans are the meat of the industry, and many people wouldn’t be able to afford the property without one. PayRent landlords have access to over 75 lenders. These funds can be used for funding new properties, covering unexpected repairs, remodels, and more.