Neighborhood Guidelines
Last Updated on: 31st January 2023, 07:51 am
One of the responsibilities you have as a property investor is knowing how to account for your rental finance activity. This means tracking every penny that comes in and goes to accurately determine the cash flow and return on your investment.
And yes, not every property expense hit every month, but when they do, you better be prepared for it because they can be expensive.
So, in this post, we’ll be going over the different expenses you may have to pay as a rental property owner.
The following are the expenses that a rental property might have to pay:
- Repair and Maintenance
- Vacancy Rate
- Property Taxes
- Property Insurance
- Mortgage Payment
- Property Management
To begin, let’s start with…
1. Repairs and maintenance
When it comes to repairs and maintenance costs of your rental properties, it’s always a good idea to budget around 10-15% of the rental rate for these expenses. But if you want to save money and be sure that you only spend money on repairs and maintenance when needed, it’s wise to purchase a rental property in a neighborhood with a low turnover rate. Meaning fewer residents moving in and out. This will reduce the need for frequent repairs and maintenance.
Let’s say you purchase a rental property in a neighborhood with a low turnover rate for $200,000 and you expect to rent that property out for $1,500 per month.
If you set aside a budget of around 10% for your repairs and maintenance costs coming from your monthly rental income, you would have $150 per month.
Calculation:
$1,500 x 10% = $150 per month
Over the course of a year, this would add up to $150 x 12 = $1,800.
Since the turnover rate of the neighborhood is low, chances are that you may not have to spend the entire $1,800 and probably may end up spending less.
But if the turnover rate in the neighborhood was high, you are likely to spend more on repairs and maintenance to keep the property in good condition for new tenants. So, before you purchase a property, make sure that you don’t buy in low-end neighborhoods, this way you can save money on repairs and maintenance costs in the long run.
2. Vacancy Rate
How does the vacancy rate add to your property expenses?
When a property has unoccupied units, it’s called a vacancy rate, and it’s a negative expense, which means negative income. And a negative income is bad because rental property owners pay a mortgage to the bank for thier property every month whether or not it’s making money.
Let’s say a property owner has 20 units, each renter pays $1,000 a month to live in each unit, the property owner would then make $10,000 a month. But if 10% of the units are unoccupied, the property owner would only make $18,000 a month because he would be missing $2,000 from the one unoccupied unit left.
So, as an investor, make sure that you do your due diligence in researching the vacancy rate in the neighborhood you wanted to buy property in.
3. Property Taxes
Property taxes are probably the easiest cost to estimate. That is because property taxes are only paid annually.
How much is the typical property tax rate in the United States?
According to the Tax Foundation, the average property tax rate in the United States is 1.31%. However. some states such as New Hampshire, Texas, and Louisiana, have lower average property tax rates of around 0.8%, while states such as Illinois, New Jersey, and New York have higher average property tax rates of around 2%.
Note that property tax rate is determined by the local government or municipality where the property is located, that’s why it varies from state to state
What determines the cost of how much your property tax will be?
The cost of your property taxes will depend on its assessed value. And during the assessment, size, age, condition, and any improvements or renovations will be taken into consideration. The assessed value of the property is then multiplied by the property tax rate in your area.
For example:
Let’s say a property has an assessed value of $300,000. The property tax rate in the area is 1.5%. The annual property tax for this property would be $4,500 ($300,000 x 1.5%).
Who assessed the property to get its market value?
The value of a property is typically assessed by a professional appraiser. They determine the value of a property by analyzing comparable sales of similar properties in the area, looking at the condition of the property, and any unique features or improvements.
Who do appraisers work for?
Professional appraisers are independent contractors who work for themselves or for an appraisal firm. They can also work for a bank, government agency, or even a private individual. But typically, for most property investors, property appraisers are typically sent out or hired to do appraisals by the lender or the bank when a borrower’s property is used as collateral for a loan.
4. Property Insurance
Why do you need insurance for your rental property?
Having insurance for your rental property helps protect it from accidents or damages such as fire, natural disasters, vandalism, or liability issues if someone gets injured on the property. It helps cover the costs of repairs or legal fees in these situations.
How much does rental property insurance cost?
It’s difficult to give an exact estimate of the cost of rental property insurance without more specific information about the property, you will need to contact insurance companies and get quotes for the coverage you need. The cost of insurance will depend on the type and amount of coverage you need, as well as the specific insurance company you choose.
How to get insurance quotes for your rental property?
To get a quote for insurance coverage for a specific property, make sure to provide your insurance agent with all the details of the property, such as address, size, age, and any special features or upgrades, so they can provide an accurate quote.
5. Mortgage Payments
If you have a mortgage on your rental property, you will need to make regular payments to your lender. The amount of your mortgage payments will depend on the terms of your loan, including the interest rate, the loan balance, and the loan term.
6. Property Management
In general, property management fees are typically a percentage of the collected rent each month. Commonly, the percentage ranges between 5% and 12%. However, some property managers may charge a flat fee or a combination of both percentage and flat fee.
Here’s an example of how property management fees might be calculated using a percentage of collected rent:
- Let’s say you charge $1,500 per month in rent for your property.
- A property management company charges 8% of collected rent each month for their services.
- In this scenario, the property management fee would be $1,500 x 8% = $120 per month.
Alternatively, here’s an example of how property management fees might be calculated using a flat fee:
- The property management company charges $100 flat fee per month for their services.
- In this scenario, the property management fee would be $100 per month, regardless of the amount of rent collected.
It’s also possible for property management company to charge a combination of both, for example:
- The property management company charges 8% of collected rent each month plus $50 flat fee per month for their services.
- In this scenario, the property management fee would be $1,500 x 8% + $50 = $170 per month.
In addition to the monthly management fee, there may also charge additional fees for specific services such as new tenant placement, lease preparation, eviction proceedings, inspections, or marketing and advertising. These additional fees can be a one-time fee or a percentage of the first month’s rent.
Curios what those are?
Red here: Property Management Companies: What They Are and What They Do?
Why do real estate property owners need to hire a property manager?
Property manager handles a variety of tasks related to managing a rental property. Also, if the property ower doesn’t have much time or expertise to handle certain tasks, such as finding and screening tenants, handling maintenance and repairs, and collecting rent, then hiring a property manager might be a good decision.
This is all the information we can provide. We’ll update this accordingly if needed.
Thanks for reading!
N.G.
