Historically and even up to this day, real estate has proven to be a money-making machine. Common benefits to rightfully owning a rental property are steady cash flow, tax benefits, wealth building and a hedge against economic inflation. That is why more and more people are investing in real estate markets because it fail-proofs their investment strategy in efficiently generating considerable income, especially when managed properly.
It is important to know the costs that come along with owning a rental property, so you can carefully maximize your investment’s full potential. You have the power to make it so by staying focused and committed to doing all the necessary hard work to make it grow big for you. Profit, is, after all, what we are aiming for.
I’ll talk about 5 costs to factor in your rental property investment. These are not guaranteed but can give you a ballpark figure and just try to recalculate from there.
- Management. – Whether you are tentatively planning to DIY or hire a professional service, you somehow need to consider how much your time that you set aside to manage your property is worth. It takes a lot of time and effort to run a business as well as managing one single rental property. More so, in maximizing your returns. Consider it as an investment and as part of your operating cost. One important factor to consider is the tax deduction implications in managing your rental property. In most cases, you can right-off professional management costs but cannot write-off the time you spend managing the home yourself.
- Maintenance. – The least you will want is to be surprised with how much maintenance can actually take so much out of your potential income. You can start off about 5% for preventive measures and go up to 15% for repairs or replacements, especially when an appliance is drawing to the end of its life. Plan early and be prepared for this upfront.
- Vacancy. The vacancy rate is used to assess the property’s economic performance and the strength of it. You want to keep it at a minimum, so the lower the percentage, the better. A healthy vacancy rate is about 8% for a rental.
- Insurance & Taxes. These represent the things I consider the inevitable facts of life. Any tangible property is being assessed for property taxes. It is calculated by multiplying the net taxable value by the tax rates applicable to it that usually varies depending on the location and property type. Certain tax deductions are being applied for veterans and head of the family. (Income taxes are another form of taxes we will not discuss in this article but need to be considered.)
Taxes are as sure as death, and so does insurance in making certain that we are not vulnerable to the effects of it. This dovetail’s tenant liability insurance your renters will carry all throughout the lease. And it is critical for the success of your rental property. It requires only a fraction and it safeguards you and your investment from any liabilities caused by untoward incidents.
Some other 4 costs that I will briefly share are:
- HOA dues vary and usually covers maintenance and improvement in common places such as lobbies, landscaping, pools, and elevators which are levied commonly in condominiums or some single family homes as well. (Source)
- Sales taxes may also be required by local municipalities that regulate rents. (Source:)
- Utility costs in addition to your vacancy adjustment.
- Legal matters and document preparation for poor tenant costs which accounts to most failure in property rental covers non-payment, and eviction process.
If I could recommend the most essential takeaway to understand the costs associated with owning rental property is that in planning with due diligence, you are moving closer to your goal of financial stability through property investment. Don’t let these costs scare you in any way. When numbers make sense, investing in rental property can be a great strategy in growing your financial nest egg.
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