A crucial part of analyzing potential investment properties is estimating your property expenses (operating expenses) as accurately as possible. These costs may include landscape maintenance, insurance, property taxes, payroll, and other management costs. Your operating expenses entail all costs except for any bank loan that was used to purchase the property.
Property expenses as percentage of gross operating income
When analyzing the financials of a rental investment property, operating costs should be between 35 and 50 percent of the gross operating income (GOI). For some high-end rental properties, the percentage may be higher. If your calculation puts operating expenses at less than 35 percent of the GOI, you should evaluate the projected numbers again. It helps to have someone else familiar with rental property ownership to review your estimates.
Maintenance costs
This depends largely on the age and condition of the property. Your inspector can provide some insight into what needs immediate attention and other problems that will need to be repaired down the road. Budget for capital expenses such as lot paving, roof replacement, and upgrades to HVAC accordingly and you will most likely be able to handle some smaller unexpected issues.
Payroll and outside managers
When using outside management companies and other contractors, call around to see what the local costs are for the needed service. You may find that you are better off paying top dollar for the best service providers rather than having to constantly replace people who are willing to work for less. Keep that in mind as you figure your costs.
Insurance
You can contact your insurance agent with some specifics on the property and get a quote based on the coverage you need. Remember to encourage or require renters to carry their own renters’ insurance policy, which can help you get a lower rate with your provider.
Tax deductions and other considerations
Have tenants cover as much of the costs related to their occupancy of the units as possible. When residents pay for water and other utilities according to how much they personally use, they are more likely to use less. You can promote the concept of requiring tenants to cover their own water and gas costs as a way to keep rental rates low for everyone. You can also deduct some necessary expenses on your tax return. Be sure to consult with your personal tax professional about what is best for your individual situation.
Poor operating cost calculations can mean the difference between a tidy profit and a significant loss, so be sure to take the time to investigate investment property expenses carefully.
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