Renting out a property is a great way to make some extra money. But it’s not just a matter of sitting back and watching the cash flow in. Before you become a landlord, analyze and estimate the operating costs of renting a home.
In a typical real estate deal, operating expenses run anywhere from 35 to 80 percent of the total income. Typical smaller rental buildings, like a single family home, duplex or triplex, average percentages more like 37.5 to 45 in their expense ratio.
These numbers are typical, but be sure to tailor your estimates to specific properties. Here are some examples of where the money goes, and why it’s not all just pure profit:
A general rule for maintenance costs is estimate 1 percent of the property value per year. So, if you have a house valued at $100,000, your estimated yearly maintenance costs would be $1,000. Costs rise, however, when the home you own is older and needs more attention. A smart way to consider maintenance costs is to overestimate, and give yourself a little cushion.
Protect yourself by getting as informed as possible about the coverage you need. Talking to an insurance agent is a surefire way to get a good insurance price estimate. Don’t forget to get covered for earthquake, liability, and flood insurance, plus any other special coverage you anticipate needing.
Property taxes will take a big chunk of your profits. Talk to the county assessor to find out exactly how much property taxes will cost you. But keep in mind, what a seller is paying now and what you will pay after closing escrow can vary significantly.
4. Property Management
Some rental property owners choose to hire a manager to take direct care of tenant needs. Hiring a property manager will usually cost about 6 to 8 percent of the rent.
Take care of your property and find tenants who will do the same. It’s always a good idea to have tenants pay utilities themselves. When the landlord covers these costs, people use way more than they do when they pay themselves.